UK services activity contracts in July
- Services output and new business both fall at fastest rates since March 2009
- Expectations weakest since February 2009
- Employment unchanged since June
The UK service sector registered a fall in business activity in July, according to the latest PMI® survey data from IHS Markit and CIPS. Output and new business both declined for the first time in over three-and-a-half years, and at the fastest rates since early-2009. Consequently, employment in the sector was unchanged since June, ending a three-and-a-half-year period of uninterrupted job creation. The 12-month outlook for activity weakened sharply to the lowest since February 2009, linked to uncertainty regarding ‘Brexit’.
The headline figure for the survey is the seasonally adjusted Markit/CIPS UK Services Business Activity Index, a single-figure measure designed to track changes in total UK services activity compared with one month previously. Readings above 50.0 signal growth of activity compared with the previous month, and below 50.0 contraction. The Business Activity Index fell to 47.4 in July, from 52.3 in June, signalling a fall in UK services output. This was the first contraction since December 2012, and the rate of decline was the strongest since March 2009. Moreover, the month-on-month decline in the Index in the latest period, at 4.9 points, was the largest observed since the survey began in July 1996.
The volume of incoming new business also declined for the first time since the end of 2012. The pace of contraction was comparatively sharper than that seen for total business activity, and the fastest since March 2009. Companies widely reported that the outcome of the EU referendum had weighed on new business inflows during the month.
The marked reduction in receipts of new work led to a fourth successive month-on-month reduction in the volume of outstanding business in the service sector. Furthermore, the pace of decline in backlogs was the fastest since September 2009.
Service providers held their workforces constant, on average, in July. This followed a three-and-a-half year period of employment growth, the second-longest in the 20-year survey history.
Cost pressures reached a three-month high in July, and the second-strongest in over two years. This was linked to salaries, fuel, food prices and the impact of the weaker sterling exchange rate. That said, inflation remained weaker than the long-run survey average. Although costs rose more sharply, prices charged by service providers increased at the slowest rate in five months.
UK service providers expect business activity to rise over the next 12 months. That said, the strength of sentiment deteriorated to an unprecedented degree over the survey history, and was the weakest since February 2009. Where activity was expected to fall, this was linked to ‘Brexit’ uncertainty.
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply:
“After three-and-a-half years of growth, the services sector returned to contraction as Brexit contagion suppressed new orders and overall output at rates last seen during the financial crisis in 2008-2009.
“The overall rate of retrenchment was the fastest since March 2009, as 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 to offset the impact of weaker economic conditions, experienced now for many months. The aversion to investment and a lack of consumer confidence also delayed or reversed contract decisions.
“Any vestiges of hope were packaged up in the potential for new international business due to a weaker pound, and employment levels remaining steady. This may be scant consolation if this Brexit hangover lasts much longer.
“But with business optimism at its most fragile since February 2009, the sector will be looking for strong, significant monetary policy decisions tomorrow, whether it is a change to interest rates or easing bias, to avoid this downward slide becoming the economic landscape for the months and years ahead. This dramatic drop in overall activity will be a reality check as much as it is unsettling, but it is just one month’s worth of data and the next month will be more revealing.”
The August UK Services PMI will be published on Monday September 5th 2016 at 09:30 UK / 08:30 UTC
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