The British economy is at risk of sliding into a deepening downturn after stalling in the first quarter, after the weakest performance in the private sector in almost seven years as Brexit approaches.
In the latest sign the gridlock over leaving the EU is extracting a high price from the economy, the survey from IHS Markit and the Chartered Institute of Procurement and Supply showed overall business activity stalled in March.
The country’s dominant services sector, which contributes about four-fifths of GDP, contracted as consumers and clients put spending decisions on hold in response to the intense political uncertainty.
The IHS Markit/Cips service sector purchasing managers’ index (PMI) fell to 48.9 in March, down from 51.3 in February, below the 50 mark separating growth from contraction for the first time since July 2016 – immediately after the EU referendum.
The survey of firms in the sector, which includes finance, hotels and restaurants, will raise alarm bells at the Bank of England and the Treasury, which keep a close eye on the PMI indicators for early warning signs from the economy.
Economists said the PMI fall was consistent with economic output for the first quarter, contracting by about 0.1%, versus growth of 0.5% over the last three months of 2018.
James Smith, an economist at the City bank ING, said: “The latest UK services PMI makes it clear that the economy is being hit hard by all the uncertainty surrounding Brexit.
“If there’s another extension to the article 50 process, potentially one that lasts for nine to 12 months, this would continue to keep a lid on investment and growth for the foreseeable future.”
IHS Markit said the economy looked likely to shrink over the coming months, and warned that growth had probably stalled in the first quarter. Both the services and construction sectors plunged into reverse in March, with manufacturing only able to expand because of emergency stockpiling in the run-up to Brexit.
So far this year, service sector order books have contracted at the steepest rate since the height of the global financial crisis in 2009, it added.
Chris Williamson, the chief business economist at IHS Markit, said: “A stalling of the economy in the first quarter will therefore likely turn into a downturn in the second quarter unless demand revives suddenly, which, given the recent escalation of Brexit uncertainty, seems highly improbable.”
Analysts have previously cautioned that the PMI readings, which rely on surveying businesses on current conditions rather than measuring sales figures, can overstate the extent of slowdowns in the economy.
The gauge had pointed to GDP growth of 0.1% in the fourth quarter of last year, before the Office for National Statistics said the economy grew by 0.2%.
Business leaders have increasingly sounded the alarm over the damage to the economy in recent months, warning that investments had been put on hold and contracts lost as Brexit uncertainty intensified.
Ruth Gregory, the senior UK economist at consultancy Capital Economics, said: “While we suspect the surveys are overstating the weakness, the Brexit shenanigans now appear to be weighing more heavily on the economy.”
IHS Markit said the PMI reading over the first quarter of 2019 was only just above the 50, at 50.6, suggesting the start of the year was the worst for the UK private sector since the fourth quarter of 2012.
While Brexit is having a significant effect, the slowdown comes amid a global downturn, particularly in the eurozone.
Manufacturing output in the single currency bloc has slumped to the lowest levels in almost six years, in a sign that the US-China trade dispute is serving as a brake on the world economy.
Chris Sood-Nicholls, the managing director and head of global services at Lloyds Bank, said: “Only when firms do get some greater clarity and can begin to plan properly again will we see how much of the current challenges are caused by underlying trends, such as slowing global growth, and how much is down to a temporary stall in confidence.”
