The UK services sector, the most significant part of the economy, has suffered its worst fall in PMI in two decades, adding to disappointing data from the manufacturing and services sector and pointing to signs of a mild recession in H2 2016.
It also means an interest rate cut at tomorrow’s Bank of England’s monetary policy committee announcement is a “foregone conclusion”, according to Chris Williamson, chief economist at IHS Markit, which conducts the surveys.
Service sector PMIs fell to 47.4 in July from 52.3 a month earlier, the largest monthly decline since the survey began in 1996.
Services account for 79 per cent of the UK economy, while manufacturing accounts for 15 per cent and construction accounts for 6 per cent, according to ONS data.
Earlier in the week, manufacturing PMIs revealed the sharpest contraction since early 2013, while construction showed its sharpest contraction since the height of the financial crisis in 2009.
“The UK saw a broad-based and severe slowing in its economy in July as Brexit-related uncertainty took its toll on business activity,” says Williamson.
It now anticipates the UK economy will slip into mild recession in the remaining quarters of 2016 and will grow at 0.2 per cent in 2017.
The survey also showed employment stagnated for the first time in three-and-a-half years.
David Noble, chief executive of the Chartered Institute of Procurement & Supply says: “with business optimism at its most fragile since February 2009, the sector will be looking for strong, significant monetary policy decisions tomorrow, whether it is a change to interest rates or easing bias, to avoid this downward slide becoming the economic landscape for the months and years ahead.”
Williamson says “it’s too early to say” if the surveys will remain weak in the months ahead, but he says the collective surveys for all three sectors indicate a 0.4 per cent contraction in UK GDP.
“The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy.
“A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow’s Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation.”
Williamson also raised concerns about second quarter GDP figures, which he says were buoyed by jumps in output of the autos and pharmaceutical sectors, which are prone to production volatility.
In contrast to the UK’s figures, composite Eurozone data released today reached a six-month high of 53.2. The index marks 37-months of growth and also showed employment growing at its fastest rate since February 2008.