The UK’s economic outlook is darkening, according to a set of surveys released this week suggesting that activity slowed sharply in September while a growing proportion of employers cut staff.
The index of service sector activity, compiled by research group IHS Markit, fell from 50.6 in August to 49.5 last month, well below analysts’ expectations. Any reading below 50 means that a majority of companies reported falls in activity.
Its release on Thursday followed similarly dismal surveys of the construction and manufacturing sectors — the latter boosted only by a resumption of Brexit-related stockpiling. This pushed the all-sector index down from 49.7 to 48.8 in September — considerably weaker than comparable measures of eurozone and global activity.
Chris Williamson, chief economist at IHS Markit, said this left the UK composite index at its lowest point since the immediate aftermath of the 2016 Brexit referendum, but that the decline was “all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock”.
Ruth Gregory, at the consultancy Capital Economics, said the service sector reading suggested that “growth in the biggest part of the economy has all but fizzled out”. This did not necessarily mean the UK was headed for a second consecutive quarter of negative growth, a technical definition of recession, but it was “a reasonable steer on the underlying strength of economic activity”, she added.
The PMI surveys are not always a reliable guide to subsequent economic developments, since they can swing sharply when there is a transient shock to sentiment. Samuel Tombs, at the consultancy Pantheon Macroeconomics, noted that the services survey excluded retail and the public sector, which have been supporting growth in recent months, and was “excessively influenced by firms’ general concerns about the Brexit and political outlook”.
However, the latest figures are consistent with official data, which have shown a steady weakening in the services sector, that accounts for 80 per cent of the UK economy, with output barely growing in the second quarter.
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The surveys add to evidence that the UK’s labour market could be on the turn, after a decade of steady growth in employment and a more recent pick-up in wage growth.
IHS Markit said a fifth of service sector companies reported a drop in workforce numbers. This was largely because they were not replacing leavers, but it was still the first decline in jobs for five months, and the sharpest since August 2010. A bigger proportion of employers in manufacturing and construction were shedding jobs.
Fabrice Montagné, economist at Barclays, said the report left “little scope for optimism”, with companies reporting a squeeze on margins and saying that overseas clients were cutting off British counterparties and diverting activity away from the UK.
A separate survey by the British Chambers of Commerce, published on Friday, showed manufacturers were reporting pressures on cash flow, and were at their most pessimistic for domestic business since 2011, with service sector companies also reporting a weakening in both sales and orders.
Suren Thiru, head of economics at the BCC, said that “a stuttering services sector coupled with a worrying downturn in manufacturing activity indicates that any bounce back in UK GDP growth . . . is likely to be underwhelming at best”.
