The British economy is at risk of falling into a deepening downturn after stalling in the first quarter, as political uncertainty is choking off growth in the UK economy with activity slipping to its weakest for six years. The closely watched IHS Markit/Cips service sector purchasing managers' index (PMI) fell to 48.9 in March, down from 51.3 in February, reflecting companies are delaying projects and hold off placing the new order. The reading was below market expectation and signalled a decline in business activity across the service sector in the country. It was the private sector's weakest performance in almost seven years as Brexit approaches and ended just over two-and-a-half years of sustained expansion. Any reading below 50 indicates a contraction in the business activity.
The release on data was on the lines of similar weak reading from the construction and manufacturing sector. The recent soft patch for UK construction output continued during March as IHS Construction Total Activity Index posted 49.7, while efforts to build safety stocks led to survey-record increases in inventories of both purchases and finished products as IHS rose to a 13-month high of 55.1 in March. The seasonally adjusted All Sector Output Index fell to 50.0 in March, down from 51.4 in February, indicating private sector business activity had stalled during the period. The index of service sector activity had fallen from 51.2 in December to 50.1 in January.
The service sector order books contracted at the fastest pace since the height of the financial crisis in 2009 and declined for a third successive month, indicating that the real picture of demand is even worse than what the headline numbers suggest. According to the survey, in response to intense political uncertainty and a lack of new work to replace completed projects so far in 2019, corporations are opting to delay spending decisions and are opting for a wait-and-watch approach. It is also reported that households are holding back spending decisions amid Brexit concerns and worries about the economic outlook.
Before committing to new projects, managers are hoping for clarity about Brexit outcomes, leading to constrained demand in March. In the last three months, new order inflows have deteriorated considerably. As highlighted by another marked drop in new work from abroad, demand for exports was particularly subdued, despite a decent uptick in global activity. Following the dismal recruitment reports in the opening months of the year, the survey showed improvement on that front. Employment numbers slightly improved in March, though the scope to hire additional employees was restricted by a tight labour market. Though the business expectation for the year remained subdued, the degree of optimism reached its highest level since October 2018.
In recent months, UK's official data and private surveys have diverged, with economists questioning about PMI surveys efficacy during the time of political stress. Analysts believe that the downbeat sentiment creeps into the qualitative surveys, which rely on surveying businesses on current conditions rather than quantitative data. Last week, growth figures published showed strong consumption.
The weak service sector data stands out in sharp contrast to other developed economies. PMIs published for European countries and the bloc as a whole reported an expansion in the sector, while March data for the US signalled a further strong expansion in business activity across the service sector. Global service sector activity expanded for the straight-second month in March.
The service sector makes up around 80 per cent of the British economy, and the latest data makes it evident that the domestic economy is being hit hard by the uncertainty surrounding Brexit.
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