UK recession more likely as services sector shrinks

Britain's service sector shrank in July, Markit research showed. [The Laird of Oldham/Flickr]

Activity in Britain’s crucial services sector sank in July following the vote to leave the EU, a survey by the research Markit group showed today (3 August), making a recession more likely.

The preliminary composite purchasing managers’ index (PMI) for the services industry sank to 47.4 points in July, down from 52.3 in June. A reading under 50 indicates shrinkage. July marked the first contraction since December 2012 and the strongest rate of decline since March 2009.

The gloomy news has strengthened the case for a Bank of England (BoE) interest rate cut on Thursday, according to economists. The data follows similar surveys showing sharp declines in the manufacturing and construction sectors, while the all-sector index sank to 47.7 points in July, down from 52.4 the previous month.

“At these levels, the PMI data are collectively signalling a 0.4% quarterly rate of decline of gross domestic product,” Markit chief economist Chris Williamson added today.

“It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn.

“However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.”

‘Dramatic deterioration’ in UK economy since Brexit

The British economy has suffered a “dramatic deterioration” in the four weeks since the UK voted to leave the EU, new figures on Friday (22 July) showed, prompting the country’s new Chancellor to warn he may have to “reset fiscal policy” in the autumn.

The technical definition of a recession is two or more consecutive quarters of economic contraction. The BoE is widely expected to cut its key interest rate on Thursday (4 August) by a quarter-point to 0.25%.

The British central bank could also decide to pump more quantitative easing (WE) stimulus cash in order to stimulate lending and bolster economic growth.

“The latest PMI data, released over the past few days, have painted a grim picture of the UK economy in the month following the results of the referendum on EU membership,” said economist Sam Alderson at research group the Centre for Economics and Business Research.

“The PMIs suggest that each of the three key sectors of the UK economy (construction, manufacturing and services) started the third quarter of 2016 on a weaker footing.”

He added: “The data place more pressure on the Bank of England to announce additional monetary stimulus as part of its August interest rate decision tomorrow.”

Brexit shockwaves hit UK consumers, wages and construction

Shockwaves from Britain’s vote to leave the European Union are reverberating through the economy with surveys published on Thursday (28 July) showing a sharp dive in consumer confidence and a slowdown in the construction sector.

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