UK Economic Growth Slows as Services Slump


May 2016

UK Economic Growth Slows as Services Slump

Uncertainty surrounding the upcoming referendum on EU membership and poor performance in the services sector have caused economic growth in the UK to stagnate in the second quarter of 2016.

The latest Purchases Manager’s Index survey from researchers at Markit/CIPS shows the slowest growth in three years in the services sector for April, with job growth in the sector also at its lowest level since the third quarter of 2013. With the services sector accounting for around 80% of the UK economy, it can be viewed as something of a canary in the mine of overall economic performance.

Other sectors suffered as well. Markit reported the first shrinking manufacturing activity for three years, as well as construction activity growing at a particularly slow rate.

Markit’s chief economist, Chris Williamson, described these three poor assessments as “a triple whammy of bad news.”

He said: “some of the slowdown may be attributable to the early timing of Easter, though April also saw an increase in the number of companies reporting that uncertainty about the EU referendum caused customers to hold back in purchases, exacerbating already weak demand linked to global growth jitters and ongoing government spending cuts.

“The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates and non-standard measures such as quantitative easing.”

Williams said that overall, these signs all point to an economy that is “near stalling”.

The head of the Chartered Institute of Procurement and Supply (CIPS, who work with Markit on the PMI reports), David Noble, also spoke of the effect of referendum uncertainty on the services sector, as well as fallout from the minimum wage increase.

He said: “The looming EU referendum has had a profound effect on the sector, keeping prices relatively stagnant and delaying new orders.

“At the other end of the supply chain, the National Living Wage has compounded cost increases, resulting in the overall rate of input price inflation hitting a 27-month high.

“Together, these factors have squeezed margins while fewer than half of businesses expect to grow over the next 12 months.”

The Markit/CIPS surveys points towards economic growth for the UK as a whole at just 0.1% for this latest quarter, an assessment shared by Credit Suisse and Capital Economics.

Bank and mortgage lender Barclay’s are forecasting no growth whatsoever for the quarter.

Referendum uncertainty is becoming an ever more prominent cause cited by the various bodies pointing towards poor economic performance in various sectors and by various metrics.

Capital Economic’s Scott Bowman said: “Brexit concerns are starting to weigh on activity more generally, after only previously being seen in specific parts of the economy.”

This sentiment is shared by economists and business owners alike.

The Financial Times quoted Steve Kerassitis, manager of pharmaceutical recruitment company Stelfox, as saying: “People take these jobs for five to 10 years. They do not know whether the UK is going to be in the EU in two years’ time, so they won’t move at the moment.”

And the Bank of England has issued yet another warning about the potential fallout from Brexit, with Mark Carney saying that it could lead to “a technical recession”.

However, as the Institute of Directors’ chief economist James Sproule argued, it is important not to place the blame for all poor economic activity on the shoulders of referendum jitters. There are more factors in play.

He said: “This uncertainty is not an excuse to take our eye off the ball on more fundamental issues of economic sustainability.”