Services sector declines at fastest rate since 2009

3 August 2016

Output and new business in the service sector have both fallen at their fastest rate since March 2009, the first contraction in more than three-and-a-half years, according to a poll of buyers.

Combined with poor results for the manufacturing and construction sector released earlier this week, the PMI data signals a 0.4% quarterly rate of decline in GDP and an increased chance of recession in the UK, a Markit spokesman said.

David Noble, group CEO, CIPS, said the service sector would be looking for a “strong [and] significant” decision from the Bank of England’s (BoE) monetary policy committee in its meeting tomorrow.

The Markit/CIPS UK Services Purchasing Managers’ Index (PMI), the first conducted entirely after the UK’s vote to leave the UK, fell from 52.3 in June to 47.4 in July. 

The PMI is a monthly poll of buyers designed to track changes in activity. A score above 50 signifies growth, a score below indicates contraction.

Last month’s contraction was linked to uncertainty caused by “Brexit contagion” suppressing new orders and output rate, said Noble.

The survey also found the sector’s business expectations for the year fell to their lowest since 2009, and employment growth stalled for the first time in more than three-and-a-half years.

“Supply chains were hit by a continuation of muddy business conditions, rises in food and fuel prices and a demand from staff for higher wages… The aversion to investment and a lack of consumer confidence also delayed or reversed contract decisions,” said Noble.

With business confidence so low, Noble called on the BoE to “change interest rates or easing bias, to avoid this downward slide becoming the economic landscape for the months and years ahead”.

Chris Williamson, chief economist at Markit, said the collective PMI data for the manufacture, construction and service sectors signalled a 0.4% quarterly rate of decline of GDP. “The unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chance of the UK sliding into at least a mild recession,” he added.

Williamson also said the extent of the downturn would be affected by policy response, and predicted the BoE would cut its interest rate to 0.25% at tomorrow’s meeting.

“A quarter-point cut in interest rates… seems to be a foregone conclusion… though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty,” he said.

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