Britain has edged closer to its first recession since the financial crisis after the country’s dominant service sector unexpectedly plunged into contraction last month, in a sign of the mounting stress facing the economy as Brexit looms.
According to IHS Markit and the Chartered Institute of Procurement and Supply (Cips), activity in the sector fell as companies reported sliding sales, job losses, cancelled and postponed projects and weak investment levels.
The warning shot for the sector – which includes restaurants, hotels and finance and accounts for about 80% of the economy – comes after separate figures indicated that construction and manufacturing output also declined last month.
Fears are mounting over the health of the global economy, with figures on Thursday showing the US service sector also slumped last month, dipping to its slowest rate of growth for three years. Activity in the eurozone ground to a halt, and the German private sector shrank for the first time in six years.
One of the two main definitions of recession in the UK is at least two quarters of shrinking gross domestic product (GDP), the broadest measure of economic prosperity. Judged by this yardstick, the UK was last in recession in 2008-09, when there were six consecutive quarters of negative growth.
The economic shock triggered by the coronavirus pandemic caused GDP to fall by 2.2% in the first quarter of 2020 and by 20.4% in the second – the sharpest decline since modern records began in 1955.
Some economists believe this definition of recession is flawed, since an economy would not be in recession if it contracted by 5% in the first quarter, expanded by 0.1% in each of the following two quarters and then contracted again by 5% in the fourth quarter. It would, however, be deemed to be in recession if it grew by 5% in each of the first and fourth quarters but contracted by 0.1% in each of the second and third quarters.
An alternative – and tougher definition – is a full calendar year of negative output. Given the UK economy has grown on average by 2.5% over many decades, it is rare for gross domestic product (GDP) to fall on an annual basis. There have been only five such years since the end of the second world war: 1974, 1975, 1980, 1981 and 1991.
The US has its own method of assessing recession, with the National Bureau of Economic Research's business cycle-dating committee making a judgment.
The NBER defines recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales".
Stock markets around the world have sold off sharply in recent days as investors grow increasingly concerned over the health of the world economy, against the backdrop of rising trade tensions between the US and China. Manufacturing output and export volumes have slumped in recent months, while the latest figures suggest the slowdown has spread to the service sector.
The FTSE 100 fell by about 40 points on Thursday, compounding a slide of almost 400 points since the start of October.
Barry Naisbitt, of the National Institute of Economic and Social Research, said: “It’s difficult to find any fantastically good news at the moment. We’re seeing uncertainties play out. An increase in tariffs, and uncertainty about tariffs, is certainly playing a role in muting world trade.”
In a sign of the stress and added uncertainty from Brexit, the IHS Markit/Cips services purchasing managers index (PMI) sank to 49.5 in September, from 50.6 a month earlier. The reading was below the forecasts of City economists, on a scale where the 50.0 mark divides economic growth from contraction.
Some companies in the survey of UK service industry firms reported overseas customers were placing spending decisions on hold or choosing other European suppliers instead, due to the uncertainty.
As Boris Johnson attempts to strike a renewed deal with Brussels with only weeks left to avert a no-deal Brexit, the report found companies had begun shedding jobs at the fastest rate since 2010. Business costs also rose due to rising staff salaries, fuel prices and the weak pound.
Duncan Brock, the group director of Cips, said: “Deferred client orders and reduced consumer spending as a result of Brexit uncertainty and a slowing global economy meant hard-pressed businesses started to lose their battle against the hardest conditions for about a decade.”
Alongside a sharp decline in construction work and a fall in factory output despite a boost from renewed Brexit stockpiling, the all-sector output index dropped to 48.8 last month from 49.7 in August.
Analysts said the survey result showed the British economy was on track to slide by 0.1% in the three months to September, as the growing likelihood of a no-deal Brexit and the wider slowdown in the global economy acts as a handbrake on growth.
The UK economy shrank in the three months to June, marking the first quarterly decline since 2012. Economists view two consecutive quarters of falling output as a technical recession. Official figures for the third quarter are due to be published next month.
Chris Williamson, the chief business economist at IHS Markit, said: “Coming on the heels of a decline in the second quarter, [the latest PMI reading] would mean the UK is facing a heightened risk of recession.
“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.”
