Photographer: Simon Dawson/Bloomberg

‘Sluggish’ Euro Area Sees Initial Brexit Fallout in Services

  • Services, composite PMIs slide to 18-month lows in July
  • Fragility of recovery leaves room for stimulus: Markit

The euro area’s service sector cooled in July as the U.K.’s vote to leave the European Union clouded the region’s outlook, according to Markit Economics.

Its Purchasing Managers Index for the sector slipped to an 18-month low, dipping to 52.7 from 52.8, it said in London on Friday. While a manufacturing measure and a joint gauge for both sectors also slipped, all three remained above the 50 level that signals expansion.

Britain’s decision to exit the bloc has cast a shadow over the prospect of its neighbors. The International Monetary Fund said this week that it had become less optimistic on global growth, and warned the damage could worsen if confidence falters among investors and companies. The lion’s share of the pain will be felt by advanced European economies, it added.

“Business confidence about the outlook in the service sector has deteriorated to the worst for just over 1 1/2 years, linked primarily to the political and economic instability induced by the U.K. referendum, pointing to near-term downside risks for an already-lackluster euro-zone economy,” said Chris Williamson, Chief Economist at Markit.

The measures suggest the region’s economy is growing at a “sluggish but reasonably steady annual rate of around 1.5 percent,” he said.

European Central Bank President Mario Draghi said on Thursday that officials won’t hesitate to add fresh stimulus if needed once they have a clearer picture of the economic impact from the British referendum.

“Policy makers will be reassured by the resilience of the PMI in the immediate aftermath of the Brexit vote, but the fragility of the recovery leaves plenty of room for speculation about further stimulus later in the year,” said Williamson.

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