Soft Services Expansion Brings U.K. Economy Close to Stagnation

(Bloomberg) -- The U.K.’s dominant services sector recovered only slightly in December from more than a two-year low, bringing the economy close to stagnation in the last quarter, IHS Markit said.

Its Purchasing Managers Index for the industry ticked up to 51.2, a stronger figure than economists were expecting. That still signaled “subdued growth conditions,” the report published Friday said, following a reading of 50.4 in November that was the lowest since the aftermath of the Brexit vote.

Soft Services Expansion Brings U.K. Economy Close to Stagnation

The services survey, together with other reports on construction and manufacturing, indicate overall economic growth of just 0.1 percent in the final quarter of last year, Markit said.

The U.K. is set to leave the European Union at the end of March, and with the government yet to agree on a divorce deal, businesses face the risk of a disruptive exit from the bloc.

“Clarity on Brexit is needed urgently in order to prevent the economy sliding into contraction,” said Chris Williamson, chief business economist at IHS Markit. “The service sector typically plays a major role in driving economic growth, but is now showing worrying signs of having lost steam.”

Survey respondents said that Brexit-related concerns weighed on business spending, and that consumer demand was feeble. Business activity for services rose at one of the slowest rates over the last 2 1/2 years, Markit said.

Key Insights

  • A lack of spending led to a dearth of new projects. There was a drop in backlogs of work for the third month running, the longest period of decline since the summer of 2016.
  • The survey points to weakest confidence since the immediate aftermath of the Brexit vote, Markit said.
  • Firms reported headwinds from political uncertainty and downbeat projections for 2019 from clients.
  • Survey respondents said tight labor conditions made it difficult to recruit skilled staff; the increase in staffing levels was limited, and efforts to cut costs led to softer employment growth in the industry.
  • An index of prices charged accelerated to the highest rate of inflation since June, mainly due to an increase in staff costs.

Get More

  • A report published earlier this week showed British factories have started stockpiling for the possibility of a disruptive Brexit.
  • The Bank of England will announce new forecasts in February when it takes its next policy decision. Officials say they are likely on a path to raising interest rates.

©2019 Bloomberg L.P.