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Financial News: UK Services Sector Contracts In September Signaling Recess

UK Services Sector Contracts In September Signaling Recession Risk

10/03/2019 - 06:19:00 (RTTNews)

(RTTNews) - British services activity decreased in September for only the fifth time in over a decade and the overall private sector shrunk for a second consecutive month, signaling that the economy may slip into recession soon.

The seasonally adjusted CIPS UK Services Purchasing Managers' Index, or PMI, fell to 49.5 in September, from 50.6 in August, survey data from IHS Markit showed on Thursday. Economists had forecast a score of 50.3.

A reading below 50 suggests contraction in the sector. The latest shrinking was characterized by the biggest decline in services sector employment over nine years.

Jobs in the service sector were trimmed for the first time in five months and at the fastest pace since August 2010. Among the surveyed firms, 19 percent reported decline in workforce, mainly due to non-replacement of leavers.

Demand weakened further with new contracts falling for the sixth time thus far this year, though the decline was marginal. Backlogs shrunk for the twelfth month in a row and at the fastest pace since January. Increased uncertainty surrounding Brexit prompted clients to postpone orders.

Increased concerns regarding a potential no-deal Brexit prompted global clients to switch their business to other markets. Foreign contracts received by UK service providers shrunk at the fastest pace since March and have risen only twice in the past 13 months.

Further, the monthly decline in the New Export Business Index of the survey was the biggest since the series began in September 2014.

Business expectations eroded for a fourth straight month in September and the decline was the sharpest since the second half of 2015. The Future Activity Index held above 50, but was the lowest since July 2016 following the EU referendum. It was also the second-lowest since March 2009.

Costs pressures continued to rise in September and was above the long-run survey average. Input prices rose sharply driven by rising costs of several sources that include energy/fuel, salaries, food and a weaker sterling.

However, stronger competition for sales amid weak demand meant service providers could raise charges only at the lowest pace since July 2016.

The composite PMI, which combines manufacturing, services and construction indexes, decreased to 48.8 in September from 49.7 in August. The latest decline was the fastest since July 2016 and the first back-to-back contraction since the final two months of 2012, IHS Markit said.

Among the three sectors, construction acitivty declined the most and services fell the least.

September's decline was "all the more ominous" as it was not a sudden shock, but the result of "an insidious weakening of demand" over the past year, IHS Markit economist Chris Williamson said.

"At current levels the surveys point to GDP falling by 0.1 percent in the third quarter which, coming on the heels of a decline in the second quarter, would mean the UK is facing a heightened risk of recession," the economist said.

"The increasingly dire readings push the surveys further into territory that would normally be associated with policy stimulus from the Bank of England, suggesting a greater likelihood that the next move in interest rates will be a cut."

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