UK economy close to recession

LONDON - Growth in the services industry lost momentum in August, indicating an overall contraction in the economy across all sectors and a drop in GDP, leaving the UK one step away from a recession.

The service sector’s purchasing managers’ index (PMI) dropped to 50.6 in August, down from 51.4 in July. Any figure under 50 indicates a contraction. Coupled with lackluster PMI dropped to 49.7 in August – falling below the predicted 50.5.

The drop in all-sector PMI is consistent with a decline in GDP of 0.1 per cent in the third quarter. GDP had already declined 0.2 per cent in the second quarter; two consecutive contractions mean the economy is in recession.

Last month’s reading for the service sector was the lowest since June, and well below the sector’s long-run average of 54.9, as the sharpest inflation since January and weaker rises in business activity and new work took its toll on the sector.

August saw confidence regarding the service industry’s activity over the next 12 months drop to a three-year low, according to IHS Markit’s report on the industry’s purchasing managers’ index (PMI).

The dip in confidence was primarily due to “concerns about the impact of domestic political uncertainty on client decision-making,” the report said.

Prices charged by service providers increased at the slowest pace for just over three years, leading to “intense pressure on operating margins” as companies faced higher costs but could not raise prices proportionality due to “intense competition for new work.”

Survey respondents blamed “a sustained headwind from Brexit-related uncertainty and subdued corporate spending” for slowing new business in the sector.

New export work also stalled, having seen a modest expansion in July. Although some respondents said overseas sales had been boosted by a weak pound, others reported “that some European clients had delayed committing to new projects in response to heightened political uncertainty.”