UK lurches towards recession as dominant services sector stalls: ‘It’s clinging on by its fingertips’

Economy on course to shrink for second consecutive quarter amid rising Brexit worries, surveys indicate

Chris Baynes
Wednesday 04 September 2019 13:38
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Financial services is among the sectors showing ‘worrying weakness’
Financial services is among the sectors showing ‘worrying weakness’

Britain is on course for its first recession since the 2008 financial crash after the dominant services sector stagnated amid rising concerns over Brexit.

Growth in the services industry, which accounts for nearly 80 per cent of Britain’s economy, almost stalled last month as business confidence plunged to its lowest level in more than three years, according to the closely watched IHS Markit/CIPS UK Purchasing Managers’ Index (PMI).

The private sector as a whole contracted in August after manufacturing and construction suffered continued slumps, the survey found.

“So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services,” said IHS Markit’s chief business economist Chris Williamson.

“After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn.”

The service sector’s PMI registered a reading of 50.6 for August, down from 51.4 in July and well below a long-term average of 54.9. A reading below 50 indicates contraction, while higher than 50 shows growth.

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, said the sector had “clung on by its fingertips this month” as overseas clients “abandoned spending in favour of a wait-and-see approach and the political environment became increasingly murky”.

He added: “There’s only so much companies can do to absorb costs before UK consumers notice the impact to their wallets, and only so much Brexit indecision the sector can take before it is tipped into contraction.”

Business confidence about the next 12 months in the service sector dropped in August to its lowest point since July 2016, the month after the referendum on membership of the European Union (EU).

Similar surveys earlier this week showed the UK’s manufacturing sector was suffering its worst downturn for seven years and the construction industry had shrunk for the fourth month in a row.

The combined PMIs for services, manufacturing and construction give a reading of 49.7 for August, down from 50.3 in July and indicate a decline across the overall private sector.

“Such weak PMIs have never been seen before in over 20 years of history in the absence of either recent or imminent Bank of England stimulus,” said Mr Williamson.

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Taken together with the all-sector PMIs for July and June, the readings suggest a 0.1 per cent contraction in GDP over the last three months.

Britain’s economy shrank 0.2 per cent in the second quarter of 2019, so a contraction in the third quarter would mean the country is in recession.

The PMIs are closely watched by the Bank of England as early indicators of moves in the wider economy, but some analysts say the surveys tend to overstate the extent of upturns and downturns.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the chances of a second consecutive drop in GBP were “remote”. He added: “The PMIs are excessively influenced by business sentiment and have given a misleadingly weak steer during the past 12 months of heightened political uncertainty.”

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