UK Service Sector First Contraction Since 2012 Worst In Over 7 Years

(RTTNews) - British service sector shrunk for the first time in over three-and-a-half years and at the fastest pace in more than seven years, amid the uncertainty linked to "Brexit", survey data from Markit Economics and the Chartered Institute of Procurement & Supply showed Wednesday.

The Markit/CIPS business activity index for services declined to 47.4 from 52.3 in June, in line with a flash estimate released on July 22. A score below 50 suggests contraction in the sector.

The monthly drop of 4.9 points was the biggest since the survey began in July 1996, Markit said.

The latest decline in services activity was the first since December 2012 and the worst since March 2009.

"The marked service sector downturn follows news from sister PMI surveys showing construction activity suffering its steepest decline since mid-2009 and manufacturing output contracting at the fastest rate since late-2012," Markit Chief Economist Chris Williamson said.

"At these levels, the PMI data are collectively signalling a 0.4 percent quarterly rate of decline of GDP."

Williamson pointed out that it was too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn.

However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession, he added.

Both services output and new orders fell for the first time in over three-and-a-half years and at the fastest rates since early-2009. Backlogs decreased at the sharpest pace since September 2009.

Employment was unchanged, ending a three-and-a-half year stretch of job creation.

That said, firms continue to expect activity growth in the next 12 months, but the strength of their hopes fell sharply to the lowest level since February 2009, linked to uncertainty over "Brexit".

Input price inflation accelerated to a three-month high and was the second strongest in over two years, mainly due to salaries, fuel, food prices and the impact of the weaker sterling exchange rate. However, output prices increased at the slowest pace in five months.

"The extent of any downturn clearly depends to some degree on the policy response," Williamson at Markit said.

"The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy."

The Bank of England is set to announce its latest interest rate decision on Thursday and is widely expected to reveal a rate cut.

"A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow's Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation," Williamson said.