UK recession alert as services struggle

The UK economy may have slid into recession for the first time since the financial crisis a decade ago, after the country’s service sector unexpectedly contracted last quarter.

The IHS Markit/CPS purchasing managers’ index for services, which is closely monitored by the Bank of England and the Treasury for early warning signs from the economy, fell to a six-month low of 49.5 in September, below the 50 level that divides growth from expansion.

It suggests the economy shrank 0.1% in the three months to September, after a 0.2% fall in the previous quarter. Two consecutive quarters of falling output is the technical definition of recession.

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The service sector, which includes restaurants, hotels and finance, accounts for about 80% of the UK economy and “has faced sliding sales, job losses, cancelled and postponed projects and a lack of investment as they braced for a disruptive Brexit” says The Guardian.

The IHS Markit/CPS report found that companies had been shedding jobs at the fastest rate since 2010, while business costs also increased last quarter due to a mixture of rising salaries, fuel prices and the weak pound, “adding to signs that Britain’s record-low unemployment could be about to go into reverse”, says City A.M.

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Some firms also reported overseas customers were placing spending decisions on hold or choosing other European suppliers instead, due to the uncertainty.

City A.M. says services “is the latest sector to fall victim to Britain’s Brexit crisis and a global economic slowdown driven by the US-China trade war”. The news “will worry policymakers as the sector had previously proved resilient”, it says.

While the survey “has sounded the recession alarm bells”, says BBC economics correspondent Dharshini David, it does not mean it will definitely happen.

Dean Turner, UK economist for UBS Global Wealth Management, said the figures were “gloomy”, but added that PMIs “have had a tendency to overreact relative to reality. It is too early to conclude that the UK is heading for a recession on these numbers alone”.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, went further. “The survey’s poor track record recently means its recession signal should not be believed,” he said. “Markit’s services survey has been far too downbeat over the last year.”

These surveys are the first monthly insight into the health of major parts of our economy, “but in these tumultuous times, they may be more of a mood check rather than a whole-body MOT”, says David. “Brexit-related anxiety: sentiment, rather than activity, may be clouding or obscuring the picture,” but the gloom may become self-fulfilling. “Sentiment can dictate all sorts of business plans - from investment to hiring. The impact of those can last longer than one quarter's GDP”.