U.K. Services Growth Can’t Prevent Economic Stagnation in July

(Bloomberg) -- The U.K.’s dominant services industry unexpectedly grew at the fastest pace in nine months in July, but the expansion may not be enough to rescue the economy from stagnation.

IHS Markit said its Purchasing Managers Index for the sector rose to 51.4 last month, the highest since October. Still, the rate of growth remains “much softer” than the average over the past decade, and taken together with measures showing contractions in manufacturing and construction, indicates the economy remained flat, Markit said.

“The overall picture is one of an economy that is only just managing to skirt recession, with July’s performance among the worst since the height of the global financial crisis in 2009,” said Chris Williamson, chief business economist at Markit.“ The latest PMI numbers are indicative of the economy stagnating at the start of the third quarter.”

July’s surveys are the latest to show the impact Brexit uncertainty is having on the economy, while worse could be ahead. Boris Johnson’s election as prime minister last month has ratcheted up concern over a potentially damaging no-deal exit, sending the pound tumbling.

Even with a Brexit deal, the future may not be rosy. The Bank of England, which bases its forecasts on a smooth departure from the European Union, last week lowered its prediction for 2019 growth, and said it sees weak business investment persisting into 2020.

A measure of new work in the drove the improvement in services in July, Markit said, although the firm also noted “widespread reports” that Brexit uncertainty and economic concerns were encouraging clients to delay spending decisions.

Meanwhile, business optimism slipped to its lowest level since March, with firms citing domestic political uncertainty and concerns about the global economic outlook. Still, some noted hopes that demand could recover if there was clarity about the U.K.’s future outside of the EU.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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