PMI reports a contraction in British services industry

The Purchasing Managers Index (PMI) has revealed a contraction in activity within the services sector in September.

PMI reports a contraction in British services industry

Howard Archer, chief economic advisor to the EY ITEM Club

This revelation completes a trio of PMI’s which showed a decline in activity across services, manufacturing and construction sectors at the end of the third quarter of the year.

EY ITEM Club has said, however, that surveys do tend to present an overly gloomy picture at times of heightened uncertainty. We suspect that the economy saw GDP growth of 0.3% quarter-on-quarter in the third quarter (and possibly even 0.4%), although this was buoyed by monthly GDP growth of 0.3% in July and clearly overstated the economy’s underlying strength. Indeed, most indicators point to the economy struggling in August and September.

The body also said that the services PMI showed business activity contracting modestly in September with the index dipping to 49.5 from 50.4 in August. The services PMI averaged just 50.5 over the third quarter. This matched the second-quarter average (when ONS data show that services output edged up just 0.1% quarter-on-quarter) and pointed to very weak services growth.

EY ITEM Club said that most elements of the September survey were soft, which is worrying for future activity. New business contracted in September, backlogs of work declined at the fastest rate since January, while confidence in the sector was at the weakest level since July 2016. Employment in the sector fell for the first time in five months and at the fastest rate since August 2010.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “September’s purchasing managers survey pointed to the sector contracting for the first time since March. Specifically, the services PMI fell to a six-month low of 49.5 in September from 50.6 in August from 51.4 in July (which although limited, was actually a nine-month high). This took the PMI back below the 50.0 level that indicates flat growth and substantially below the services PMI lifetime (1996-2019) average of 54.9.

“The services PMI averaged just 50.5 over the third quarter. This matched the second-quarter average and pointed to very weak services growth. Hard data from the Office for National Statistics show that services output grew just 0.1% quarter-on-quarter in the second quarter, which was its worst performance for three years.”

Mr Archer added: “The details of the September survey was disappointing across the board, which is worrying for future activity. New business contracted in September for the first time since June and for the sixth month so far in 2019. Heightened Brexit uncertainties were reported to have led to a delay of orders by some companies while consumer spending was also softer.

“Export orders fell amid evidence international clients had switched business to other markets amid increased concerns about a potential no-deal Brexit. A weakened global economy also weighed on export orders.”

Mr Archer continued: “Meanwhile, backlogs of work declined at the fastest rate since January and for a 12th consecutive month. Confidence in the services sector was the weakest since July 2016 and the second-lowest since March 2009. Employment in the sector also fell for the first time in five months and at the fastest rate since August 2010.

“The difficult conditions facing some services companies is evident from the squeeze on their margins amid a need to price competitively. Output prices rose at the slowest rate since July 2016 and only slightly. This was despite input prices rising at an elevated rate, albeit at a slightly reduced rate than in August.”

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