UK economy ‘stalls’ as services sector suffers over Brexit and global economy fears

Subdued demand conditions meant that business activity was broadly flat at the start of 2019, while concerns about the economic outlook weighed more heavily on staff recruitment.

Latest data pointed to an overall reduction in payroll numbers for the first time in just over six years.

At 50.1 in January, the headline seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index was down from 51.2 in December and only fractionally above the crucial 50.0 no-change value.

The latest reading was the lowest for two-and-a-half years and the second-weakest since December 2012.

Survey respondents overwhelmingly linked the slowdown in business activity growth to heightened political uncertainty at the start of 2019. A number of service providers reported that Brexit-related concerns had dampened client demand and resulted in delayed decision making on new projects.

Sector data suggested that Transport & Communication and Financial Intermediation were the weakest performing areas of service sector activity.

New business volumes declined for the first time in two-and-a-half years during January, although the rate of contraction was only modest. Political uncertainty was the most commonly cited reason for lower new orders, with firms noting that Brexit concerns had led to more cautious spending among clients and risk aversion in relation to new projects.

Backlogs of work decreased for the fourth month running in January, which pointed to reduced pressure on business capacity and a lack of new orders to replace completed projects.

Meanwhile, service providers reported more cautious staff hiring strategies in response to subdued demand and heightened uncertainty about the economic outlook. Although only marginal, the reduction in employment numbers was the first seen since the end of 2012. This was mainly linked to the non-replacement of voluntary leavers.

Despite softer demand for staff, service sector firms continued to cite higher salary payments as a key factor driving up input costs during January. There were also reports that exchange rate depreciation had contributed to rising operating expenses at the start of the year. The overall rate of input cost inflation edged up to a three-month high.

However, intense competition for new work contributed to the slowest increase in average prices charged by service providers since September 2018.

Optimism towards the year ahead outlook for business activity rebounded slightly from December’s 29-month low.

That said, the latest reading was still one of the lowest seen since early 2009.

Chris Williamson, chief business economist at IHS Markit, said: “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.

“Service sector growth ground almost to a halt in January, matching similar disappointing news in the manufacturing and construction sectors. 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% in the fourth quarter.

“With the exception of July 2016, when demand contracted briefly following the surprise Brexit vote, service providers suffered the largest drop in new business since April 2009 as customers tightened their belts.

“Service sector employment fell for the first time in the past six years in a sign that the slowdown is feeding through to the labour market.

“The survey results indicate that companies are becoming increasingly risk averse and eager to reduce overheads in the face of weakened customer demand and rising political uncertainty. Such worries were in turn most commonly linked to heightened Brexit anxiety, though wider global political and economic factors were also seen to have been taking their toll on demand.”