Recession risk falls as services sector rebounds

Britain's powerhouse services sector bounced back last month, reducing the chances that the country will fall into a recession.

By The Newsroom
Monday, 5th September 2016, 5:00 pm
Updated Monday, 5th September 2016, 6:01 pm
The UK's services sector saw its fortunes improve in August  Photo: Lynne Cameron/PA Wire
The UK's services sector saw its fortunes improve in August Photo: Lynne Cameron/PA Wire

The closely-watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 52.9 in August, up from 47.4 in July and above economists’ expectations of 50.0. A reading above 50 indicates growth.

The services sector, which accounts for around 79 per cent of the UK economy, recorded its first contraction since December 2012 in July – while activity recorded its steepest decline for more than seven years, as Brexit uncertainty took its toll on the industry.

The sector swung back to growth in August as companies reported that uncertainty had eased.

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However, some economists have cautioned that we could be witnessing “a dead cat bounce”; a short-lived recovery after a rapid period of decline. The phrase is derived from the idea that even a dead cat will bounce if it falls from a great height.

The latest PMI report said the month-on-month gain of 5.5 points was the biggest leap since the survey began 20 years ago. Output picked up after new work grew at its fastest pace for four months, after the pound’s slump to 31-year lows following the EU referendum result lifted the demand for exports and bolstered UK tourism.

The sector also saw confidence return to its pre-Brexit vote levels, while employment also increased in August following a pause in July.

Businesses in the industry were feeling more confident about export opportunities, stable markets and reduced uncertainty, while some were lifted by signs of recovery in the energy sector, the report said.

However, the weaker pound ramped up costs to a near three-year high, causing services firms to bump up their prices at the fastest rate since January 2014.

The rebound comes after a surprise improvement in manufacturing output in August. The UK construction industry also showed signs of recovery last month as activity picked up from July’s seven-year low.

Chris Williamson, chief business economist at IHS Markit, said the record rise in services data builds on last week’s positive PMI reports from construction and manufacturing. This suggested that the UK economy may avoid an imminent recession, he said.

“The three PMI surveys point to a stagnation of the economy so far in the third quarter, meaning much hinges on the September data to see whether the economy contracts or ekes out modest growth,” said Mr Williamson.

“It remains too early to say whether August’s upturn is a ‘dead cat bounce’ or the start of a sustained post-shock recovery, but there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate.

“Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to ‘buck Brexit’ and carry on regardless.”

Jeremy Cook, chief economist at the international payments company, World First, said: “After a hat-trick of declines in the month after the Brexit vote, all three PMIs have bounced back healthily the following month; limiting the fears that the UK is set to plunge into an immediate post-vote recession.

“We will have to wait a few months to be sure that this is not a blip, but initial reports of higher confidence, export orders and foreign demand are all heartening.

“As with the manufacturing economy, a significant portion of the rebound seems to have generated from the devaluation of the pound, and the other side of this double edged sword is higher inflation expectations.”