UK services sector unexpectedly contracts in September
The UK services sector unexpectedly contracted in September, according to data released on Thursday, with the economy edging closer to recession.
The IHS/Markit CIPS services purchasing managers' business activity index fell to a six-month low of 49.5 from 50.6 in August, missing expectations for a reading of 50.3 and dropping below the 50 level that separates contraction from expansion.
The survey revealed the biggest cut in employment in more than nine years, while companies were the least optimistic about future growth since after the EU referendum in 2016.
The drop in the index reflected lower volumes of new and outstanding business. New contracts fell for the sixth time this year, albeit marginally, while backlogs were down for the twelfth successive month and at the fastest rate since January, with worries about Brexit prompting clients to postpone orders.
Chris Williamson, chief business economist at IHS Markit: "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."
He said Brexit concerns dominated the survey responses, linked by companies to falling sales, cancelled and postponed projects, a lack of investment and job losses.
David Cheetham, chief market analyst at XTB, said: "Coming shortly after weak readings from the manufacturing and construction sector this data makes it a triple whammy of bad news for the UK economy is as many days and points to a GDP fall of 0.1% in Q3.
"Should this occur then the UK would enter a technical recession under the widely held definition of two consecutive quarters of negative growth - and that’s before we’ve even got that close to the current October 31st deadline for leaving the EU."
However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the survey’s poor track record recently means its recession signal should not be believed.
"Taken at face value, Markit’s services survey indicates that the economy has ground to a halt and that domestically-generated inflation is fading, therefore justifying interest rate cuts by the Monetary Policy Committee.
"Markit’s services survey, however, has been far too downbeat over the last year. This partly reflects the fact that it excludes output in the distribution and public sectors, which rose by 2.0% and 0.9%, respectively, on a year-over-year basis in July. In addition, the survey is excessively influenced by firms’ general concerns about the Brexit and political outlook, which likely have built further over the last month.
"Output in the private non-distribution services sector- which the PMI is supposed to shadow - rose by 0.2% on a three-month-on-three month basis and by 1.3% on a year-over-year basis in July, even though the services PMI has pointed to a mild downturn since November. We see no reason why the PMI, or other business surveys, suddenly would be on the money now, having misled for the last year. Accordingly, we continue to expect GDP to rise by 0.3% on a quarter-on-quarter basis in Q3 and for the MPC to hold back from cutting interest rates, provided that a no-deal Brexit is avoided."
Despite the bad news, sterling held its own, trading up 0.1% against the dollar and the euro at 1.2309 and 1.1232, respectively.