FEARS are growing that the UK economy could slide into recession following the Brexit vote, after an influential survey reported a shocking contraction in the services sector.
The Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 47.4 in July, down from 52.3 in June - the biggest monthly fall in activity on record. A reading above 50 signals growth.
It marked the first contraction in the services sector since December 2012 and the steepest rate of decline for more than seven years, while the month-on-month drop was the worst since records began in July 1996.
The dismal performance from the service sector - which accounts for more than two thirds of the overall economy - points to a 0.4 per cent fall in gross domestic product (GDP) in the third quarter after surveys for the manufacturing and construction sectors also showed falling activity.
Chris Williamson, chief economist at Markit, warned there was “undoubtedly” a higher risk of recession in the UK - two quarters in a row of falling GDP - after the all-sector PMI reading showed a record fall from 51.9 in June to 47.3 in July.
He said: “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.”
The dire PMI readings mean a cut in interest rates by the Bank of England is now a “foregone conclusion”, according to Mr Williamson.
Policymakers are widely expected to slash rates to a new historic low of 0.25 per cent from 0.5 per cent, while also potentially launching further economy-boosting measures to ward off the threat of recession.
However, Dr Michael Nolan, a senior lecturer in economics at the University of Hull, stressed that the reported PMI falls are negative indications of short-term prospects.
Mr Nolan added: “However, they are unsurprising, and not overly dramatic in magnitude – given the acknowledged importance, and unexpected nature, of the UK’s vote to leave the EU. The outlook for an immediate UK recession will become clearer with the release of more figures over the next two to three months, and as it emerges what policy interventions are being undertaken by bodies such as the Bank of England’s Monetary Policy Committee.”
A report from influential think-tank the National Institute of Economic and Social Research (NIESR), warned there was a 50/50 chance of a recession over the next 18 months.
Jack Meaning, a research fellow at NIESR, said the Bank needs to use a “sledgehammer” to offset a deepening downturn in the economy following the vote to leave the EU.
It is predicting growth will hit 1.7 per cent overall this year with a decline of 0.2 per cetn in the third quarter and risk of “further deterioration”, while GDP will slow to 1% in 2017 while inflation is forecast to reach more than 3%, according to its analysis.
The services PMI figures show activity in the sector going into reverse after three and a half years of growth.
David Noble, group chief executive at the Chartered Institute of Procurement & Supply (CIPS), said “Brexit contagion” had hit new orders and left overall output at rates last seen during the financial crisis.
The survey also signalled that incoming new business declined for the first time since the end of 2012.