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UK Economy Headed for Recession after Services Shrink Unexpectedly : Report

September's IHS Markit/CIPS services Purchasing Managers' Index (PMI) fell to a six-month low of 49.5, below the 50 level that divides growth from contraction.


Updated:October 3, 2019, 2:50 PM IST
UK Economy Headed for Recession after Services Shrink Unexpectedly : Report
File image of British Prime Minister Boris Johnson.

London: Britain's economy appears to have tipped into recession as firms brace for the risk of a disruptive Brexit in just a few weeks' time, according to a survey which showed the dominant services sector took an unexpectedly sharp downturn last month.

Prime Minister Boris Johnson has promised to take Britain out of the European Union by Oct. 31 come what may, despite parliament passing a law ordering him to secure a new transition deal to soften the economic blow.

Against this backdrop, September's IHS Markit/CIPS services Purchasing Managers' Index (PMI) fell by more than any economist predicted in a Reuters poll, tumbling to a six-month low of 49.5, below the 50 level that divides growth from contraction.

Combined with even weaker manufacturing and construction surveys earlier in the week, September's all-sector PMI sank to 48.8 from 49.7, its lowest since the month after the referendum decision to leave the EU in June 2016, and before that 2009.

IHS Markit said the figures suggested Britain's economy shrank by 0.1% in the three months to September. "Coming on the heels of a decline in the second quarter, (this) would mean the UK is facing a heightened risk of recession," IHS Markit economist Chris Williamson said.

Britain's economy shrank by 0.2% in the three months to June - the first decline since 2012 - and a second quarterly contraction would meet the recession definition used in Europe. On Wednesday, Johnson sent new Brexit proposals to the EU and said that unless the bloc compromised, Britain would leave without a deal at the end of this month.

Leaving the EU without a deal risks causing major disruption to trade, at least in the short term, due to the immediate imposition of new tariffs and regulatory checks at ports. Britain's economy is also slowing due to the trade conflict between the United States and China.

"Insidious Weakening"

The PMI data are not a fail-safe guide to the outlook for the economy. Immediately after the Brexit referendum in 2016, they pointed to a sharper downturn than was actually the case. But longer-term trends in the all-sector PMI generally match up well with official quarterly growth numbers.

"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," Williamson said. Firms which took part in Thursday's survey - which does not cover retailers - reported that foreign customers were switching business away from Britain due to fears of a no-deal Brexit.

New export orders fell at the sharpest rate since March, when Britain was originally due to leave the EU.

Solid consumer demand has so far cushioned Britain's economy from some of the impact of Brexit uncertainty, helped by the lowest unemployment rate since 1975 and wages that are rising at the fastest pace in a decade. But the latest survey added to signs from consumer sentiment surveys that jobs could be becoming less secure.

Services businesses shed staff at the fastest rate in nine years in September. Taken as a whole, this week's PMIs pointed to the sharpest fall in employment since December 2009. Firms said they mostly reduced staff by not replacing leavers, rather than through lay-offs.

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