Services Bring U.K. Economy to a Near-Halt Ahead of Brexit

(Bloomberg) -- The U.K. economy is at risk of stalling after growth in the services sector came close to a standstill, with firms growing increasingly anxious about Brexit.

The purchasing managers index for services dropped to a 2 1/2-year low in January, IHS Markit said in a survey, falling more sharply than economists had forecast. Companies said they were less likely to start new projects and that clients were spending more cautiously because of a lack of clarity around Britain’s departure from the European Union.

The pound fell after the release, and was 0.2 percent lower at $1.3005 as of 11:12 a.m. in London.

Services Bring U.K. Economy to a Near-Halt Ahead of Brexit

With just more than 50 days to go until the U.K. is due to leave the EU, Prime Minister Theresa May is still struggling to get British lawmakers to agree on a divorce deal. As she tries to find a solution, pressure is mounting amid news that Nissan Motor Co. has abandoned plans to expand production in the U.K.

Chris Williamson, chief business economist at IHS Markit, said the economy is “at risk of stalling or worse as escalating Brexit uncertainty coincides with a wider slowdown in the global economy.”

Still, as the PMI is based on a survey, it may be overstating the nature of the slowdown, as it did after the 2016 EU referendum. Consensus forecasts are currently for 0.3 percent growth this quarter, based on responses before the latest PMI.

What Our Economists Say:

“The combination of Brexit uncertainty and global growth jitters is undoubtedly putting the brakes on economic growth in the U.K. But is the PMI right to be signaling stagnation? We doubt it. We think the economy is likely to grow over the first quarter, albeit below trend, while news of a Brexit deal should usher in a cyclical upswing.”

--Dan Hanson, Bloomberg Economics

The report follows disappointing Markit surveys on manufacturing and construction for January and comes just days before the Bank of England publishes its latest policy decision on Feb. 7. The central bank, which has long warned of the damage from Brexit to investment, will also publish new forecasts for growth and inflation.

The services report showed that new business volumes declined for the first time in 2 1/2 years, employment fell and optimism in the sector was close to the lowest levels in a decade.

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