The U.K. Is on Course for a Recession
The U.K. may be on course for its first recession since the financial crisis after Brexit uncertainty pushed down the nation’s dominant services industries more than expected.
Growth in the sector almost stalled last month, IHS Markit said as it published its Purchasing Managers Index Wednesday. With similar surveys indicating the nation’s manufacturing and construction industries are in deep downturns, the readings imply the economy is set to shrink 0.1% in the third quarter, Markit said.
Output already fell 0.2% in the three months through June, which means that such an outcome would mean the country had entered a recession even before it leaves the European Union at the end of next month.
“Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers.” said Chris Williamson, chief business economist at Markit. “The lack of any meaningful growth in the service sector raises the likelihood that the U.K. economy is slipping into recession.”
Worse could be to come amid fears that Boris Johnson’s government could pursue a potentially damaging no-deal exit. Those concerns, supercharged by the risk on an imminent election, have sent the pound tumbling, with the currency dropping below $1.20 for the first time since early 2017 on Tuesday.
Markit’s index for the services sector fell to 50.6 last month, below economists’ expectations for a reading of 51. Business optimism slipped to its lowest level since the immediate aftermath of the 2016 referendum, while input price inflation accelerated to its strongest since January.
The U.K. situation is particularly “tense because of the uncertainty created by Brexit,” OECD Chief Economist Laurence Boone told Bloomberg Television on Wednesday. “Since Brexit negotiations started, investment growth has been zero, a flat line. That’s a reflection of the uncertainty around the world.”
Brexit won’t be “that big a deal“ for the EU, Boone said, adding that there are funds available to help badly affected countries and sectors, like agriculture and electronics.
Similar reports earlier this week showed the U.K.’s manufacturing sector is in its worst downturn since 2012, while the construction industry contracted for a fourth straight month. Still, most analysts still predict overall growth will bounce back in the three months through September, partly as a result of renewed stockpiling ahead of the Oct. 31 exit date.
©2019 Bloomberg L.P.