UK services sector practically grinds to a halt in June

There was more bad news on the UK economy on Wednesday as a survey showed that activity in the services sector pretty much ground to a halt in June.

The IHS/Markit CIPS services purchasing managers' business activity index fell to 50.2 from 51.0 in May, missing expectations for an unchanged reading a hitting a three-month low.

The index came in just above the 50 mark that separates contraction from expansion.

Subdued activity was attributed to sluggish domestic economic conditions and greater risk aversion amid ongoing Brexit uncertainty. Reflecting this, there was a fractional decline in new business received by service sector companies, while lower volumes of new work have now been recorded in five of the past six months.

The composite index, which includes the construction and manufacturing sectors, fell to 49.2 in June from 50.7 in May, signalling a drop in overall private sector business activity for the first time in nearly three years.

Chris Williamson, chief business economist at IHS Markit, said: "The near-stagnation of the services sector in June is one of the worst performances seen over the past decade and comes on the heels of steep declines in both manufacturing and construction.

"Collectively, the PMI surveys indicate that the economy has slipped into contraction for the first time since July 2016, suffering the second-steepest fall in output since the global financial crisis in April 2009.

"The June reading rounds off a second quarter for which the surveys point to a 0.1% contraction of GDP. The latest downturn has followed a gradual deterioration in demand over the past year as Brexit-related uncertainty has increasingly exacerbated the impact of a broader global economic slowdown. Risks also remain skewed to the downside as sentiment about the year ahead is worryingly subdued, suggesting the third quarter could see businesses continue to struggle. "

Data out on Monday showed the UK manufacturing sector slumped in June, weighed down by a slowing global economy and Brexit uncertainty. The IHS Markit CIPS manufacturing PMI fell to 48.0 from 49.4 in May, marking the lowest reading since February 2013 and the third consecutive month the index had fallen. It was also below forecasts for a reading of about 49.5.

The news didn't get any better on Tuesday as it emerged that UK construction output plunged to a 10-year low in June. The IHS Markit CIPS construction total activity index dropped to 41.3 last month from 48.6 in May, undershooting expectations of 49.2.

Capital Economics said that given the falls in the manufacturing and construction indices, the smaller drop in the services PMI "was a bit of a relief".

"Indeed, it’s only a little below the average reading of 50.5 over the past six months," said UK economist Andrew Wishart. "That said, based on past form it still suggests the sector stagnated in Q2 following a 0.4% expansion in Q1."

Ranko Berich, head of market analysis at Monex Europe, said the UK macro picture looks "grim" after the services PMI, "which rounds off a trifecta of dismal UK surveys".

"The overall picture is one of an economy that’s not well placed to withstand any further political shocks, for example, blonde ones with a penchant for brinkmanship and heated rhetoric. Whoever ends up in No 10 will inherit an economy on the brink of contraction - and will have very limited margin for error in the next phase of the Brexit mess.

"The Bank of England has reason to tread carefully around this set of weak figures, as surveys of this sort often overstate the impact of political risk on output. The sharp contraction in PMIs seen in 2016 after the EU referendum proved to be a false signal, and confidence bounced back rapidly. However, this time we’ve seen a steady decline in survey output and confidence, as opposed to one sudden drop of the sort seen in 2016.

"Another reason to pay particular attention to this survey miss is that Eurozone services output remained reasonably solid in June - suggesting that the UK is suffering from a confluence of negative factors including Brexit and overall global trade tensions."