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Recession risk looms as economists predict economy will shrink in the second quarter after service sector growth stalls

Stalling growth in the services sector, on top of big declines in manufacturing and construction activity, suggest Britain’s economy ‘slipped into contraction’ for the first time since July 2016, authors of a closely watched economic survey have warned.

The Markit/CIPS UK Services purchasing managers’ index for last month undershot forecasts, showing a reading of 50.2, down from 51 in May and lower than the 51 predicted. A reading of 50 or above indicates growth.

Earlier this week, data for the construction and manufacturing sectors was equally weak, meaning the country’s total output suffered its second-steepest fall since the global financial crisis in April 2009.

Taking all sectors in account, following the final IHS Markit/CIPS PMI reading for June, the country’s economy is forecast the have recorded a fall of 0.1 per cent between April and June.

Two or more quarters in a row of economic contraction is defined as a recession.

Chris Williamson, chief business economist at IHS Markit, said: ‘The near-stagnation of the services sector in June is one of the worst performances seen over the past decade and comes on the heels of steep declines in both manufacturing and construction.’

Howard Archer, chief economic adviser to the EY Item Club, said: ‘Overall, the June purchasing managers surveys point to the UK economy struggling markedly at the end of a very challenging second quarter following the UK’s delayed exit from the EU.

‘This ties in with our view that GDP likely contracted 0.2 per cent quarter-on-quarter in the second quarter.’

In terms of why the service sector struggled last month, industry insiders said uncertainty surrounding Brexit was causing potential clients to adopt ‘greater risk aversion.’

New business coming into the service sector fell last month, amid ‘sluggish domestic economic conditions.’ Work volumes have been lower in all but one of the last six months.

With little new work coming into the sector, the level of ‘unfinished business’ fell for the ninth consecutive month.

While little new work came through last month, costs continued to rise, amid rising wages and higher transport costs. But, tellingly, prices charged by service providers increased at the second-slowest rate since June 2017, reflecting intense competition for new work.

Staff hiring at some service sector companies went against the grain in this stagnating backdrop, as the rate of new job hires rose to its highest since August 2017.

Collectively, the service, manufacturing and construction sector output index slipped to 49.2 in June, down from 50.7 a month earlier.

Mr Williamson of IHS Markit said: ‘The June reading rounds off a second quarter for which the surveys point to a 0.1 per cent contraction of GDP.

‘The latest downturn has followed a gradual deterioration in demand over the past year as Brexit-related uncertainty has increasingly exacerbated the impact of a broader global economic slowdown.

‘Risks also remain skewed to the downside as sentiment about the year ahead is worryingly subdued, suggesting the third quarter could see businesses continue to struggle.’

He added: ‘The worsening picture will put further pressure on the Bank of England to add stimulus. For policymakers to not loosen policy with the all sector PMI at its current level would be unprecedented in the survey’s two-decade history.’

Allan Ramsay, managing director and head of business services at Lloyds Bank Commercial Banking, said: ‘After what felt like a short reprieve from the uncertainty affecting businesses, the current heightened lack of clarity appears to be weighing heavy on the UK’s services sector once again.

‘Perhaps understandably, services businesses generally remain cautious, with some putting the brakes on investment and instead opting to hold on to cash until the current fog of uncertainty lifts.

‘Despite this, it is a hugely diverse sector and there are sub-sectors that are continuing to evidence healthy demand.’

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