Drop in UK services activity raises likelihood of recession

UK services activity fell more than expected in August, increasing the possibility that the country is slipping into recession with both the manufacturing and construction sectors already showing marked declines.

The services purchasing managers’ index compiled by IHS Markit dropped to 50.6 in August from 51.4 in July, below economists’ expectations of 51.0. A reading above 50 indicates that a majority of businesses in the country report activity is expanding. The performance is the worst since 2008.

Chris Williamson, chief business economist at IHS Markit, said so far this year the services economy had endured its worst performance since 2008.

Months of muted or falling activity has heightened fears of recession, defined as two quarters of contracting economic output, with the threat of the UK leaving the EU without a deal at the end of October hanging over businesses.

Respondents to the survey said Brexit-related uncertainty had led to slower growth in business intakes, stalling export orders and sluggish corporate spending.

“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,” Mr Williamson said.

The UK economy contracted 0.2 per cent in its second quarter compared with the previous three months, according to the Office for National Statistics, and PMI indices for July and August indicate the decline could continue.

Mr Williamson said the combined results pointed to a 0.1 per cent contraction in gross domestic product for the third quarter. The composite reading of purchasing manager surveys, including manufacturing and construction, dropped to 49.7 in August from 50.3 in July.

The latest services survey also showed intense pressure on margins, as rising staff wages, fuel costs and utility bills led to input price inflation. Moreover, increased competition forced companies to cut prices, which rose at the slowest rate in more than three years.

“The falls in the new orders balance, from 53.0 to 50.8, and in the employment balance, from 52.6 to 50.5, were concerning and suggest that the headline balance may fall further next month,” said Thomas Pugh, UK economist at Capital Economics.

The subdued services results follow indications earlier this week of a deeper contraction in the manufacturing sector, which shrank for the fourth month in a row in August to 47.4, the lowest level since 2012.

This was followed on Tuesday by evidence of the fastest fall in over 10 years in new construction orders.

But Mr Pugh said Brexit preparations and car manufacturing could help the country avoid a recession, despite growing evidence that the economy was slowing.

Samuel Tombs, chief UK economist at Pantheon Economics, also said the likelihood of the GDP shrinking for a second month were “remote”, arguing that growth in the third quarter would be boosted by the growing retail and government sectors.

“In addition, the PMIs are excessively influenced by business sentiment and have given a misleadingly weak steer during the past 12 months of heightened political uncertainty,” he said.

The August services survey showed a sharp drop in optimism over the outlook for the next 12 months, falling to its lowest level since July 2016.

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, blamed an “increasingly murky” political environment for a month in which the services sector “clung on by its fingertips”.

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.”