UK on brink of recession as service sector slammed in July

 
Jake Cordell
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Even hipster coffee shops might be feeling the Brexit squeeze
Even hipster coffee shops might be feeling the Brexit squeeze (Source: Getty)

The UK could already be in the midst of a recession according to fresh economic data out this morning.

The latest purchasing managers' index (PMI) data has revealed the dominant services sector shrunk in the first full month after the EU referendum as the shock of the UK's vote to leave appears to have taken an immediate toll on businesses.

Activity in the industry, which makes up around four-fifths of the UK economy, came in at 47.4 on the closely-watched PMI where scores below 50 signify contraction. The score was bang in line with a previous flash estimate and experts said it pointed to a wider economic contraction of around 0.4 per cent on a quarterly basis.

It is only the second time the services industry monthly reading has fallen below 50 in more than five years and the decline marks the fastest rate of contraction since early 2009. It comes after manufacturing and construction PMI scores earlier this week also came in below 50 and as the Bank of England's monetary policy committee (MPC) meets to decide whether to cut interest rates.

Businesses in the sector also brought to an end the three-and-a-half year run of month-on-month employment growth, with businesses holding staff numbers flat in the wake of the referendum result.

Although companies said they still expect business to increase over the next 12 months, "the strength of sentiment deteriorated to an unprecedented degree," Markit, which compiles the survey, said.

All of the current PMI scores, the most reliable, up-to-date and forward-looking indicators of the state of the UK economy, are "consistent with GDP contraction," according to the Economist Intelligence Unit's Danielle Haralambous.

Markit's chief economist Chris Williamson said: "The PMI data are collectively signalling a 0.4 per cent quarterly rate of decline of GDP.

Read more: Construction tumbles at fastest pace since the recession

"The unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession," he added.

The disappointing score all but confirms the Bank of England will slash interest rates when it meets to take the most important monetary policy decision since the recession tomorrow. Markets have fully priced rates hitting a new all-time of 0.25 per cent with many economists also predicting an extension of the Bank's quantitative easing programme and the possibility of further cuts later in the year.

On previous occasions when the PMI has sunk this low, the Bank has cut rates by 50 basis points, though few expect Carney to take rates all the way to zero without waiting for more post-referendum data to emerge.

Although the figures indicate the UK economy contracted in July, a slowdown for the entire quarter could still be avoided, experts said.

"Activity for the whole of the third quarter may not be quite as weak as the July PMI suggests. Given that the survey was conducted fairly soon after the referendum, there is a possibility that this could reflect an initial shock factor," said Ruth Gregory of Capital Economics.

Dean Turner, an economist at UBS wealth management added: "Until the fog of Brexit begins to clear, it is frankly too early to tell whether the latest string of disappointing data is a real cause for concern. Time will tell if a recession is on the cards but it is clear we now face a period of lacklustre growth."

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