Economic data points to looming UK recession

Economic data points to looming UK recession

The UK will enter a recession within months, according to the latest economic data.

The purchasing managers index data for the services sector of the UK economy, which is about two thirds of GDP, measured 50.6 in August.

Any reading above 50 constitutes growth, but the reading was sharply below the 51.4 recorded in July, and worse than economists had expected.

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Recent data for the manufacturing and construction sectors showed readings below 50, indicating those parts of the economy are already in recession.   

A recession is defined by economists as two consecutive quarters of economic contraction and data released at the start of August showed the economy shrank by 0.2 per cent in the three months to the end of June 2019.

Another quarter of negative growth would, therefore, constitute a recession.

Chris Williamson, chief business economist at IHS Markit, which compiles the PMI data, said: "After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession.

"Companies have grown increasingly gloomy about the outlook due to the political situation and uncertainty surrounding Brexit, adding to downside risks in coming months."

The services sector is traditionally stronger in the UK than other parts of the economy, as it is based upon less sensitive to global economic growth and Rajan Naik, a director of Financial Markets Online, said the data had "chipped away at the last bulwark against recession".

PMI data measures sentiment in a sector, not actual activity and Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that over the past year, the data measuring sentiment had painted a “misleading” picture of the health of the economy because political uncertainty had weighed heavily on sentiment.

But, he said this sentiment had not been reflected in actual economic uncertainty. 

Mr Tombs said the chances of the UK entering official recession were “remote”, pointing to UK retail sales remaining strong, which was likely to be the decisive factor in helping the country avoid recession.

He said: "The PMIs' predictive power has been poor lately, as it has been previously when political uncertainty is high. Their downbeat message was wide of the mark in quarter four last year and quarter one this year."