U.K. Services Unexpectedly Shrink Under Weight of Brexit Fears

(Bloomberg) -- The U.K.’s services industry unexpectedly contracted last month as the nation’s dominant sector became the latest victim of escalating uncertainty over the EU divorce.

IHS Markit’s Purchasing Managers Index for the industry slid to 49.5 in September, unexpectedly dropping below the 50 mark that indicates expansion. That’s worse than the lowest estimate in a Bloomberg survey of 33 economists.

Both new and outstanding business declined, and there was evidence foreign firms had switched activity away from the U.K. amid fears of a no deal Brexit, Markit said. A measure of expectations also fell to their weakest level since 2016.

“Only the collapse in confidence immediately following the 2016 referendum has seen a steeper overall deterioration in the economy during the past decade,” said Chris Williamson, chief business economist at IHS Markit. “September’s decline is all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock.”

The reading sees services, which account for about 80% of the U.K. economy, join Markit’s gauge of the manufacturing and construction sectors in shrinking. The latter two have been in contraction since May as the U.K. prepares to leave the European Union later this month.

The malaise is even showing signs of hurting employment, so far the bright spot of the economy, with service firms shedding jobs at the fastest rate in nine years.

A composite measure for the whole economy fell to 49.3 last month, also falling short of economist estimates compiled by Bloomberg. Markit said the surveys point to overall growth of 0.1% in the third quarter.

“The increasingly dire readings push the surveys further into territory that would normally be associated with policy stimulus from the Bank of England, suggesting a greater likelihood that the next move in interest rates will be a cut,” Williamson said.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, David Goodman

©2019 Bloomberg L.P.