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UK services bounce fails to budge recession fears

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UK services bounce fails to budge recession fears
FILE PHOTO: The Shard is seen as workers use umbrellas to shelter themselves from the rain while crossing London Bridge in London February 28, 2014. REUTERS/Eddie Keogh   -   Copyright  Eddie Keogh(Reuters)
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By Andy Bruce and David Milliken

LONDON (Reuters) – Britain’s dominant services sector unexpectedly perked up in July, a major survey showed on Monday, but this did little to shift fears that Brexit risks and U.S.-China trade tensions are pushing the economy close to recession.

The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) rose to a nine-month high of 51.4 from 50.2 in June, above all forecasts in a Reuters poll of economists that had pointed to an unchanged reading.

Despite the improvement, the services PMI stands well below its long-run average and a composite PMI also including last week’s weak manufacturing and construction numbers only just rose above the 50 mark that divides growth from contraction.

Services account for about 80% of British economic output, though the UK PMI does not cover retailers or public services.

A PMI for the euro zone services sector fell short of expectations but still beat its British equivalent.

“We expect growth below trend until Brexit is resolved, but see a robust labour market and resilient consumer — reflected in today’s modest beat,” Morgan Stanley economists Jacob Nell and Bruna Skarica said.

The Bank of England expects official data on Friday to show growth in the world’s fifth-largest economy slowed to zero in the three months to June, as the boost from premature Brexit preparations in early 2019 fades.

The start of the third quarter looks little better, with worries mounting that Prime Minister Boris Johnson is seriously considering taking Britain out of the European Union on Oct. 31 without a transition deal, risking major economic disruption.

Even without a chaotic Brexit, the BoE sees a one-in-three chance the economy will be shrinking in year-on-year terms by early next year.

Car sales fell to their lowest since 2012 in July, adding to woes for a sector that says it will be one of the hardest hit by a no-deal Brexit that would sever pan-European supply chains.

Sterling weakened to its lowest in nearly two years against the euro on Monday, while 10-year British government bond yields fell to an all-time low below 0.5%, with little immediate reaction to the data.

The low level of bond yields reflects increased trade tensions between the United States and China as much as Brexit, and this adds to challenges for British companies, though IHS Markit said some firms reported help from the weaker currency.

The survey showed the fastest influx of new export orders since September 2018.

Not all services companies benefited equally, and activity at business services companies contracted at a rate exceeded only once in the past 10 years.

“The overall picture is one of an economy that is only just managing to skirt recession, with July’s performance among the worst since the height of the global financial crisis in 2009,” said Chris Williamson, chief business economist at IHS Markit.

(Editing by Catherine Evans)

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