Economy set to shrink as services output disappoints

Fears are growing that the British economy shrank in the second quarter, after fresh figures showed that the services sector was close to stagnation last month.

The IHS Markit/CIPS UK services purchasing managers’ index (PMI) showed a reading of 50.2 in June, down from 51 in May.

Economists had been expecting a reading of 51.

It rounds off a hat-trick of disappointing PMIs, after figures this week showed that the manufacturing and construction industries shrank in June.

While the number is above the 50 threshold which indicates growth, subdued client demand and further reductions in new work put the services sector close to stagnation.

Taken together, the PMIs indicate that the British economy contracted in June for the first time in nearly two years.

The All Sector Output Index, which is a weighted average of manufacturing, construction and services activity, slipped to 49.2 in June, down from 50.7 a month earlier.

Chris Williamson, chief business economist at IHS Markit, which compiles the survey, 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,” he said.

“Collectively, the PMI surveys indicate that the economy has slipped into contraction for the first time since July 2016, suffering the second-steepest fall in output since the global financial crisis in April 2009.”

A broken union flag on the backdrop of the European Flag
A broken union flag on the backdrop of the European Flag

Ongoing Brexit uncertainty was blamed for another month of lower new work levels, with declines now recorded for five of the last six months.

However, job numbers picked up in June, with respondents to the survey linking recruitment to long-term expansion plans.

The economy’s contraction in June will add to fears of a decline in Gross Domestic Product (GDP) in the second quarter.

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% quarter-on-quarter in the second quarter.”

The Office for National Statistics (ONS) will release GDP figures for the second quarter on August 9.