The closely-watched Markit/CIPS services purchasing managers' index (PMI) has posted the biggest monthly fall in activity on record, fueling fears that the country could be heading into a recession, following the shock Brexit vote in June.
Output and new business both fell, with the Business Activity Index falling from 51.9 in June to 47.3 in July, its lowest level since the recession in April 2009. Any figure below 50 indicates that activity is contracting.
The volume of incoming new business declined for the first time since the end of 2012. And for the first time in three and a half years, employment growth came screeching to a halt, with service providers holding their workforces constant.
Chris Williamson, chief economist at Markit, said that the figures suggested that a further cut in interest rates was almost inevitable.
“The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy,” Williamson said. “A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow’s Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation.”
“It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.”
“Services providers are certainly bracing themselves for worse to come, with a record drop in business confidence about the year ahead leaving optimism at its lowest ebb since February 2009,” he added.
The UK’s services sector dominates the UK economy, contributing around 78% of GDP.
David Noble, group chief executive officer at the Chartered Institute of Procurement & Supply, said that decisive action was needed from the Bank of England in order to prevent what could become years of economic turbulence.
“With business optimism at its most fragile since February 2009, the sector will be looking for strong, significant monetary policy decisions tomorrow, whether it is a change to interest rates or easing bias, to avoid this downward slide becoming the economic landscape for the months and years ahead,” he said, adding: “This dramatic drop in overall activity will be a reality check as much as it is unsettling, but it is just one month’s worth of data and the next month will be more revealing.”