IHS MARKIT / CIPS UK SERVICES PMI®
- New and outstanding business both decline
- Fastest rate of job shedding since August 2010
- Weakest expectations for activity since July 2016
The latest IHS Markit / CIPS PMI® data for the UK service sector signalled a contraction in activity in September, and the biggest cut in employment in over nine years. With both new and outstanding business declining at the end of the third quarter, companies were the least optimistic of future growth of activity since July 2016 following the EU referendum.
The seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index fell to 49.5 in September, from 50.6 in August, signalling a decline in service sector output. Though indicative of only a marginal rate of reduction, it was only the fifth time in over a decade that the headline index has fallen below the no-change threshold of 50.0.
The overall reduction in service sector output reflected lower volumes of both new and outstanding business. New contracts fell for the sixth time in 2019 so far, albeit only marginally, while backlogs declined for the twelfth successive month and at the fastest rate since January. Firms reported that heightened uncertainty around Brexit had led to the postponement of orders by clients.
The service sector labour market weakened notably in September. Jobs at service sector companies were cut for the first time in five months, and at the fastest rate since August 2010. Workforces fell at 19% of survey respondents, with most commenting on the non-replacement of leavers as opposed to compulsory redundancies.
The latest survey also provided evidence that international clients had switched business to other markets amid increased concerns around a potential no-deal Brexit. The volume of new export business received by UK service providers dropped at the fastest rate since March. Moreover, the monthon-month decline in the New Export Business Index was the largest observed since the series began in September 2014. New work from overseas has risen only twice in the past 13 months.
Business expectations weakened for the fourth month running in September, the most sustained slide in sentiment since the second half of 2015. The Future Activity Index remained above 50.0 but was the lowest since July 2016, and the second-lowest since March 2009.
Average input prices continued to rise sharply in September, with the rate of inflation remaining above the long-run survey average. Firms mentioned a range of sources of rising costs, including energy/fuel, salaries, food and the weakness of sterling. Cost pressures in the latest period were slightly above the trend since 2018, but weaker than in 2017.
The rate of inflation of prices charged by service providers continued to slow in September, pointing to stronger competition for sales amid weak demand. Charges rose the least since July 2016.
All Sector PMI indices are weighted averages of comparable manufacturing, construction and services PMI indices. Weights reflect the relative size of the manufacturing, construction and service sectors according to official GDP data.
The UK All Sector Output Index is a weighted average of the UK Manufacturing Output Index, the UK Total Construction Activity Index and the UK Services Business Activity Index. The Index fell to 48.8 in September, from 49.7 in August, indicating a second successive decline in total private sector output. This marked the first back-to-back contraction since the final two months of 2012. Moreover, the rate of decline accelerated since August, to the fastest since July 2016.
All three sectors registered lower output in September. Excluding July 2016, following the EU referendum, this was the first broad-based decline since April 2009. Construction recorded the steepest drop in activity, and services the weakest.
New business also declined across all three sectors in September, resulting in the second-steepest overall contraction since April 2009 (the strongest was in July 2016). Overall private sector new work has dropped in seven out of the first nine months of 2019.
UK private sector employment fell at the fastest pace since December 2009 in September. Jobs in manufacturing and construction fell at faster rates while services employment declined for the first time in five months, albeit marginally.
Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey: "A trio of grim reports on the economy means that the vast service sector has now joined manufacturing and construction in decline. Only the collapse in confidence immediately following the 2016 referendum has seen a steeper overall deterioration in the economy during the past decade, but September’s decline is all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock.
“At current levels the surveys point to GDP falling by 0.1% in the third quarter which, coming on the heels of a decline in the second quarter, would mean the UK is facing a heightened risk of recession.
"Brexit-related concerns dominated the September survey responses, linked by companies to falling sales, cancelled and postponed projects, a lack of investment and job losses.
"While the early summer had seen resilient jobs growth, the surveys indicate that employment is now falling at the fastest rate since December 2009.
"The increasingly dire readings push the surveys further into territory that would normally be associated with policy stimulus from the Bank of England, suggesting a greater likelihood that the next move in interest rates will be a cut."
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “Momentum and optimism were in woefully short supply in September after many months of persistent uncertainty in 2019 pushed the Index below the no change mark. Deferred client orders and reduced consumer spending as a result of Brexit uncertainty and a slowing global economy meant hard-pressed businesses started to lose their battle against the hardest conditions for about a decade.
"There was no respite in the form of input costs which continued to rise relentlessly as fuel and food became more expensive along with wages as businesses made some hard decisions. Fewer firms were passing on costs to retain market share focusing on resources instead, and resulting in the biggest reduction in staffing levels since August 2010.
"An exhausted sector’s optimism faded away to July 2016 levels and new export orders fell at their fastest rate since March. Some respondents mentioned overseas customers were putting spending decisions on hold or choosing other European suppliers instead. In this last month before the Brexit deadline, there is little time or vision for a major turnaround in fortunes before the end of the year."