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UK recession fears mount after services activity contracts

Survey results show contraction across all three sectors of the economy at the fastest pace since the 2016 EU referendum.

Britain is facing a heightened risk of recession after Brexit uncertainty saw activity in the dominant services sector slam into reverse last month, according to a report (Andrew Matthews/PA)
Britain is facing a heightened risk of recession after Brexit uncertainty saw activity in the dominant services sector slam into reverse last month, according to a report (Andrew Matthews/PA)

By Holly Williams, PA Deputy City Editor

Britain is facing a heightened risk of recession after Brexit uncertainty saw activity in the dominant services sector slam into reverse last month, according to a report.

The closely-watched IHS Markit/CIPS UK services purchasing managers’ index (PMI) showed a worse-than-expected reading of 49.5 in September, down from 50.6 in August.

A figure above 50 indicates growth, below that represents contraction.

It marks the first contraction since March and only the fifth in more than a decade.

The services report follows PMI surveys which showed that output also fell across construction and manufacturing, with the all-sector index contracting for the second month in a row – the first such back-to-back contraction since the final two months of 2012.

Only the collapse in confidence immediately following the 2016 referendum has seen a steeper overall deterioration in the economy during the past decade Chris Williamson, IHS Markit

The all-sector reading also shows the steepest decline since July 2016 following the EU referendum.

It points to a potential 0.1% fall in gross domestic product (GDP) in the third quarter, which would put the UK in a technical recession, following a 0.2% decline between April and June.

Chris Williamson, chief business economist at IHS Markit, which compiles the survey, said: “Only the collapse in confidence immediately following the 2016 referendum has seen a steeper overall deterioration in the economy during the past decade, but September’s decline is all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock.

“At current levels the surveys point to GDP falling by 0.1% in the third quarter which, coming on the heels of a decline in the second quarter, would mean the UK is facing a heightened risk of recession.”

He added that the grim readings suggest the Bank of England may look to boost the economy, increasing the “likelihood that the next move in interest rates will be a cut”.

The PMI figures showed jobs were cut across the services sector – which accounts for around three-quarters of UK economic output – for the first time in five months and at the steepest rate for nine years.

Workforces shrunk at 19% of services firms surveyed for the PMI, although most said this was achieved by not replacing staff who left rather than compulsory redundancies.

New contracts also fell for the sixth time this year as firms warned clients were putting orders on hold due to uncertainty over Brexit.

Across all sectors, employment fell at the fastest pace for 10 years.

The figures come after Prime Minister Boris Johnson submitted revised Brexit proposals to the EU on Wednesday, saying that unless Europe compromised, Britain would leave without a deal on October 31.

With little sign of support from the EU and the UK Parliament having passed a law preventing no deal, there appears no end in sight to the Brexit chaos that is damaging the economy.

But economist Samuel Tombs at Pantheon Macroeconomics said recession fears may be overdone, with the PMI reports having been “far too downbeat over the last year”.

He said: “The survey’s poor track record recently means its recession signal should not be believed.

“We continue to expect GDP to rise by 0.3% on a quarter-on-quarter basis in the third quarter and for the MPC (Monetary Policy Committee) to hold back from cutting interest rates, provided that a no-deal Brexit is avoided.”

PA

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