Britain’s services sector hit by recession fears

The likelihood that UK is sliding into a recession rose as new figures last week showed growth in the country’s crucial services sector grinding to a halt.
Private sector output fell in August, according to a closely-watched gauge from data firm IHS Markit, dragged down by manufacturing production hitting a seven-year low. Near stagnation in the services sector have heightened fears.
Bank of England governor Mark Carney told MPs the economy was running “close to zero”. He said: “The economy is softer than I would have expected a few month ago.” He added that the global slowdown was dragging on GDP.
Also, Swiss banking giant UBS blamed the US-China trade war as it cut its global growth outlook to 2.5 per cent in the coming quarters, falling from a previous estimate of 3.2 per cent.
The British economy has been rocked in recent months as political stalemate in parliament weighs on confidence and business investment. GDP shrank by 0.2 per cent in the second quarter and tweeters on the edge of a contraction in the third quarter as MPs continue to grapple with Brexit. A contraction in the third quarter would tip the UK into technical recession. Weak data from services, which make up about 80 per cent of the UK economy, scuppered analysts’ hopes that the sector would counteract weakness elsewhere.
IHS Markit’s respected services purchasing managers’ index (PMI) fell to 50.6 in August, barely above the 50 mark which indicate expansion, from 51.4 in July. Economists had been expecting a score of 51. Services sector weakness “raises the likelihood that the UK economy is slipping into recession”, IHS Markit chief economist Chris Williamson said.
He added that activity in the sector “almost stalled” as “Brexit related worries escalated, curbing spending by both businesses and consumers.” Carney warned MPs at his regular appearance before the Treasury Select Committee that Brexit would exacerbate the problems. However, he said a no-deal Brexit would have a less severe impact than previously expected due to increasingly thorough preparation.
“Brexit, whatever form it takes, will represent a real adjustment to the economy for a period of time,” he said. “Relative incomes will be lower than they otherwise were, there’ll be a terms-of-trade shock.” Incoming European Central Bank (ECB) chief Christine Lagarde, meanwhile, called on European governments to prop up their own growth through fiscal stimulus.
Furthermore, economic optimism in the service sector fell sharply in August to levels not seen since 2013, according to a report from accountants BDO. Their services optimism index dropped 3.89 points in August to 95.49 per cent, only just above the 95 level that indicates a recessionary mindset has taken hold. The index provides information on future economic developments based on opinion surveys of more than 4,000 respondents.
When confidence falls, it can drive businesses to invest less and hire fewer people, in turn creating conditions for a recession.
The drop, in services confidence, has dragged the overall economic optimism index down by 3.21 points in the month. The firm’s employment index also fell 0.26 points in August, marking eight consecutive months of decline. Coupled with lacklustre construction and manufacturing output, the UK’s all-sector PMI dropped to 49.7 in August — falling below the forecast 50.5.
The dip was primarily due to “concerns about the impact of domestic political uncertainty on client decision-making.”
Peter Hemington, partner at BDO, said: “This month’s dramatic fall in confidence is a very worrying event. This reminds me very much of the aftermath of the 2010 election, when there was a sudden realisation that austerity wasn’t going to be pretty.” He added: “Sentiment collapsed as a result, and this was the precursor to a long period of very low growth that followed.”
However, looking at the current scenario of a growth slowdown, chief executive of financial firm, Elemental Financial, Kevin von Neuschatz, points out that a cautious approach to spending commitments by businesses before the outcome of Brexit is decided does not mean a loss of confidence in the UK. While recent forecasts suggest a slowdown, London remains a hub of entrepreneurialism and innovation, and a go-to headquarters for ambitious companies.
The financial services industry alone contributed over £132bn to the UK last year and the booming tech industry attracted £6.3 billion in venture capital funds. The UK remains a powerhouse for investment and innovation to ride out the current economic turbulence.
(The author is our foreign correspondent based in the UK. He can be reached at andyjalil@aol.com)