What's going on?
Data on “services” like healthcare, insurance and entertainment was released for the Eurozone and the UK on Thursday – and both showed slowing momentum (although perhaps for different reasons).
What does this mean?
For the UK, the data suggested that service activity is growing at the slowest pace since 2013. Further bad news for the economy came earlier this week when manufacturing activity (e.g. making stuff in factories) fell to a 34-month low and growth in construction activity also slowed. That means that overall economic growth is likely falling versus the 4th quarter last year.
For Europe, the services number dropped to a 13-month low. That means that the recovery in European economic growth is almost certainly stalling.
Why should I care?
For markets: Slowing growth is typically bad for stocks. The value of a company’s stock is, very simply, based on how much profit it makes. When the economy slows and, say, people decide not to buy that new car and, therefore, don’t take out car insurance, it hurts profits. In the next few months, the UK will be a bit of a special case because a lot of the focus will be on the potential disruption caused by the Brexit vote (which could be temporary, e.g. if Brits vote to remain in the EU). In Europe, the slowing momentum seems more entrenched and difficult to reverse.
The bigger picture: Economists blamed the poor stock market and Brexit risks for the UK’s slowdown in services. As you can imagine, a lot services in the UK are financial services – and when markets get turbulent, as they were for much of February, people don’t make as much money. Also, a date for the Brexit referendum was set and polls suggested an increased risk of a “Yes” vote. Economists say the uncertainty isn’t good for business as, regardless of what the outcome will be, businesses will curtail investment while the outcome is up in the air.