Britain is on the edge of sliding back into recession for the first time in a decade as a closely watched survey revealed that political uncertainty has damaged the services sector.
Activity in the services industry, which accounts for four fifths of national output, slowed almost to a halt in August, according to the monthly purchasing managers’ index from IHS Markit and the Chartered Institute of Procurement & Supply.
The economy is now on track to shrink by 0.1 per cent in the three months to September, IHS Markit said. That would make two consecutive quarters of negative growth, after the 0.2 per cent decline in the period to June, the definition of a technical recession.
Chris Williamson, its chief business economist, said: “After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the services sector raises the likelihood that the UK economy is slipping into recession.”
Whether or not Britain skirts a downturn ten years after the financial crisis, the economy is now in the midst of its “worst spell since 2009”, according to the survey.
Activity among factories and builders is contracting and the services sector, which includes banking, logistics and law, is almost stagnant. Business optimism and new orders across the private sector are deteriorating, employment has stalled and cost pressures on firms are mounting.
“Business worries continued to centre on Brexit-related uncertainty, as well as broader fears regarding the prospect of slower economic growth at home and abroad, often in turn linked to geopolitical tensions and trade wars,” Mr Williamson said.
The services PMI completes the set of surveys for August. The sector’s reading fell to 50.6 from 51.4 in July and below forecasts for 51. Anything below 50 indicates contraction.
The survey also revealed a sharp drop in optimism in the sector, with confidence for the coming year falling to its lowest level since the collapse in sentiment immediately after the referendum result in 2016. Service companies “cited a sustained headwind from Brexit-related uncertainty and subdued corporate spending”.
New export orders stalled as “some European clients delayed committing to new projects in response to heightened political uncertainty”.
Companies continued to rely on clearing backlogs of work for business and recruitment slowed.
With all three surveys now published, the all-sector PMI for August dropped to 49.7 from 50.3 in July. Mr Williamson said: “Taken together, the July and August PMI readings indicate a 0.1 per cent rate of GDP decline, putting economic output on course to fall over the third quarter. With GDP having already declined 0.2 per cent in the second quarter, any further contraction would constitute a technical recession, albeit only mild.”
The PMIs do not provide a complete picture of the economy as they reflect private sector activity only and exclude retail. Government and household spending has provided a counterweight to weak private sector growth and may do so again.
Critics also claim that the PMIs tend to overstate upturns and downturns because they reflect feelings as much as hard data. However, they are closely watched by the Bank of England and the Treasury as early indicators of moves in the wider economy.