FEARS of UK recession and expectations of an emergency cut in interest rates today have been fuelled by confirmation that the Brexit vote triggered the worst plunge in services sector output since the depths of the last recession.
Overall output and new orders for the UK’s services companies tumbled last month at the fastest pace since March 2009, as a three-and-a-half-year period of employment growth in the sector came to a sudden halt, a survey from the Chartered Institute of Procurement & Supply showed.
The services sector weakness was in line with CIPS’s “flash” estimate published on July 22. The survey showed UK services companies’ confidence about the prospects for activity on a 12-month view dropped to its weakest since February 2009 in the wake of the Brexit vote.
Chris Williamson, chief economist at CIPS survey compiler Markit, said that at least a quarter-point cut in UK base rates from their record low of 0.5 per cent seemed to be a “foregone conclusion” at today’s meeting of the Bank of England’s Monetary Policy Committee. UK base rates have been at 0.5 per cent since March 2009.
However, a survey published today by the Institute of Directors reveals 60 per cent of members believe a rate cut will make no significant difference. It also shows members are, overall, now pessimistic about the UK economy over the next 12 months.
Combining CIPS’s surveys of manufacturing, construction and services activity in July, the all-sector purchasing managers’ index (PMI) dropped from 51.9 in June to 47.3 in July to signal the sharpest overall fall in UK economic output since April 2009.
Mr Williamson noted the July reading was consistent with a quarterly rate of decline of UK gross domestic product of 0.4 per cent.
The drop in the all-sector PMI was the biggest monthly fall in this index since comparable records began nearly 20 years ago, taking it well below the level of 50 deemed to separate expansion from contraction.
Mr Williamson 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.
“Service providers are certainly bracing themselves for worse to come, with a record drop in business confidence about the year ahead leaving optimism at its lowest ebb since February 2009.”
He noted Markit was forecasting the UK economy would slip into a “mild recession” in late 2016 and barely grow next year, with GDP rising by a “mere 0.2 per cent”.
The IoD survey shows a dramatic reversal since the General Election of how business leaders think the UK Government should tackle the budget deficit. In May last year, eight out of ten directors said they supported the Government’s manifesto pledge to eliminate the fiscal deficit by 2020. Following the Brexit vote, 78 per cent think new Prime Minister Theresa May was right to drop the target.
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