UK economy stalls as services flatline and Brexit fears mount

Combined with weak recent surveys from construction and manufacturing, the likelihood is that the UK economy stalled in early 2019

The UK’s services firms saw activity almost flatline in January as firms reported mounting Brexit fears from clients.

The Purchasing Managers’ Index came in at 50.1, the weakest since the aftermath of the 2016 Brexit vote and only just above the 50 mark that separates growth from contraction.

Combined with weak recent surveys from construction and manufacturing, analysts said the the UK economy likely stalled in early 2019.

The disappointing reading sent the pound down sharply to $1.3022, down 0.13 per cent on the day, with traders apparently betting that rate rises from the Bank of England are now less likely.

“The latest PMI survey results indicate that the UK economy is at risk of stalling or worse as escalating Brexit uncertainty coincides with a wider slower slowdown in the global economy,” said Chris Williamson of IHS Markit, which compiles the survey.

“The last three months have seen the economy slip into its weakest growth spell for six years, and indicate that GDP likely stagnated at the start of 2019 after eking out modest growth of just 0.1 per cent in the fourth quarter.”

Duncan Brock of the Chartered Institute of Procurement & Supply, which sponsors the survey, said Brexit was the main culprit.

“At the risk of sounding like a broken record, Brexit uncertainty continues to be at the heart of the malaise as clients delayed orders and consumers were deeply reluctant to spend under the continuing cloud of hesitation, indecision and ambiguity.”

Weakest since 2016

The PMI for the sector covers businesses such as hotels, restaurants, transport and finance, although not retail.

It also showed that in January services firms reduced jobs for the first time since 2012.

UK GDP grew by 0.6 per cent in the third quarter of 2018. The figure for the final quarter, released next week, is expected to show a slump to 0.2 per cent.

The PMIs for January are consistent, on a historic basis, with flatlining GDP in the first quarter of 2019.

Some analysts said that might be misleading, however.

“Since 2004, the rate of GDP growth implied by the PMIs has been wide of the mark by an average of 0.3 percentage points,” said Samuel Tombs of Pantheon.

“They were far too downbeat immediately after the referendum, suggesting that they tend to overstate the impact of political uncertainty on the economy. They also pointed to downturns in activity in 1998, 2001 and 2003 that failed to materialise.”