Phillip Inman 

UK companies hit by sharpest activity drop since Brexit vote

Economy forecast to contract as services and manufacturing firms blame fall on uncertainty
  
  

staff in a call centre
The services sector accounts for about 75% of the UK economy. Photograph: Colin McPherson/The Guardian

Britain’s private sector companies suffered the sharpest drop in activity this month since the EU referendum, as the prospect of a general election added to Brexit-related uncertainty.

Most businesses blamed a contraction in activity in November on faltering confidence among both domestic and overseas customers, who are worn out by continuing political indecision.

Analysts said that the latest snapshot of the UK services and manufacturing sectors would heap pressure on the Bank of England to cut interest rates in the first half of next year. Not since July 2016 and the weeks after the EU referendum have businesses cut back on new orders and production to such an extent, according to the IHS Markit/CIPS flash index of business activity.

The composite purchasing managers’ index (PMI) covering the two sectors fell to 48.5 from 50 in October, where a figure below 50 indicates contraction. It is the first time the flash measure, which covers about 85% of the full PMI data, has been used to give an early indication of UK private sector activity.

Chris Williamson, the chief business economist at IHS Markit, said the figures suggested the UK economy was likely to shrink in the final quarter of 2019, following growth of 0.3% in the third quarter.

He said: “With an upcoming general election adding to Brexit-related uncertainty about the outlook, it’s no surprise to see UK businesses reporting falling output and orders in November. The weak survey data puts the economy on course for a 0.2% drop in GDP in the fourth quarter, and also pushes the PMI further into territory that would normally be associated with the Bank of England adding more stimulus to the economy.”

For much of the year, the UK economy has only avoided slipping into a recession following a fall in imports that has improved net trade and a boom in government spending. Consumer spending has also remained high, though not as buoyant as expected after a couple of years of inflation-busting pay rises.

IHS Markit said Brexit uncertainty was the overarching concern of most companies and the main factor depressing business activity.

Manufacturing companies reported that customer overstocking ahead of the Brexit deadline on 31 October had acted as a brake on factory output. But it was a fall in services output that dragged down the composite figure in November.

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“Service providers continued to link weaker demand to delayed decision-making in response to domestic political uncertainty, especially among large corporates. Some survey respondents also commented on more subdued consumer spending patterns in November,” said the IHS Markit report. “As a result, new business volumes dropped for the third month running, partly reflecting the sharpest fall in sales to overseas clients since the start of 2019.”

Howard Archer, the chief economic advisor to the EY Item Club, said: “There is very little, if anything, in the survey on which to pin hopes for a pick-up in activity in the near term at least.”

Elizabeth Martins, a senior economist at HSBC, said: “The UK economy is slowing. Whether political certainty following the election can reverse this remains to be seen.”

She said a cut in interest rates was more likely following the survey, which Bank of England officials on the monetary policy committee (MPC) are known to study carefully. “However, we won’t hear much from the MPC on how they are seeing the economy ahead of the election: they have entered a ‘quiet period’, in which they cannot comment.,” she added.

 

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