Wednesday 4 September 2019 10:19 am

UK economy close to recession after stagnant service sector data

Growth in the services industry lost momentum in August, indicating an overall contraction in the economy across all sectors and a drop in GDP, leaving the UK one step away from a recession.

The service sector’s purchasing managers’ index (PMI) dropped to 50.6 in August, down from 51.4 in July. Any figure under 50 indicates a contraction. Coupled with lacklustre manufacturing and construction output, the UK’s all-sector PMI dropped to 49.7 in August – falling below the predicted 50.5.

The drop in all-sector PMI is consistent with a decline in GDP of 0.1 per cent in the third quarter. GDP had already declined 0.2 per cent in the second quarter; two consecutive contractions mean the economy is in recession.

Read more: British pound soars after Boris Johnson suffers Brexit blow

Last month’s reading for the service sector was the lowest since June, and well below the sector’s long-run average of 54.9, as the sharpest inflation since January and weaker rises in business activity and new work took its toll on the sector.

August saw confidence regarding the service industry’s activity over the next 12 months drop to a three-year low, according to IHS Markit’s report on the industry’s purchasing managers’ index (PMI).

The dip in confidence was primarily due to “concerns about the impact of domestic political uncertainty on client decision-making,” the report said.

Prices charged by service providers increased at the slowest pace for just over three years, leading to “intense pressure on operating margins” as companies faced higher costs but could not raise prices proportionality due to “intense competition for new work”.

Survey respondents blamed “a sustained headwind from Brexit-related uncertainty and subdued corporate spending” for slowing new business in the sector.

New export work also stalled, having seen a modest expansion in July. Although some respondents said overseas sales had been boosted by a weak pound, others reported “that some European clients had delayed committing to new projects in response to heightened
political uncertainty.”

“The abrupt slowing of Britain’s totemic service sector has chipped away at Britain’s last bulwark against recession,” said Financial Markets Online’s Rajan Naik.

“While the UK has officially posted only one quarter of contraction, this unrelentingly bleak trio of PMIs shows the cheque is already in the post for a second quarterly fall in GDP – and thus a recession, ” he continued.

“Ordinarily such a blazing red warning light about the economy would send sterling sliding and tip the markets into a funk. But the trench warfare in the Commons, and the looming prospect of both a general election and a ‘no-deal’ Brexit, have given the Pound a curious gallows indifference; it responded with barely a flicker. ”

“So instead we face the prospect of another day in which the markets are being driven not by economic analysis but by the slow-motion car crash of political events.”

IHS Markit’s Chris Williamson said August’s all-sector decline “has pushed the surveys further into territory that would normally be associated with looser monetary policy. Such weak PMI readings have in fact never been seen before in over 20 years of history in the absence of either recent or imminent stimulus such as rate cuts or quantitative easing.”

Read more: Boardroom survey finds fears over UK economy

“Even if a no-deal Brexit is avoided, the uncertainty relating to the UK’s trading position with the EU will spill into 2020, dampening demand, exports and investment,” Williamson added.

“We therefore remain unconvinced that the Bank of England will be in any position to hike interest rates at least until 2021, and the deteriorating data flow raises the possibility that, whatever happens in terms of Brexit, the next interest rate could be a cut.”