Britain’s economy feared to shrink in coming months

London: Britain’s economy looks likely to shrink over the coming months, after Brexit worries caused the dominant services sector to contract for the first time in nearly three years, a survey showed on Wednesday.

The IHS Markit/CIPS Purchasing Managers’ Index (PMI), a survey of services ranging from giant banks to high-street hairdressers, tumbled to 48.9 in March from 51.3 in February, weaker than all forecasts in a Reuters poll of economists.

Britain’s vital services sector shrank in March for the first time in almost three years, with activity slammed by Brexit turmoil and flat economic growth, a key survey showed Wednesday.

 The PMI, a closely watched barometer of the economy’s health, is now below 50 and in contractionary territory for the first time since July 2016, immediately after Britons voted to leave the European Union.

“Amid all the noise in Westminster, the latest Markit/CIPS PMI makes it clear the economy is being hit hard,” ING economist James Smith said in a note.

Britain’s economy has been sluggish since the 2016 Brexit referendum and saw its weakest expansion in six years in 2018, even though unemployment fell to its lowest in more than 40 years.

The slowdown in the global economy has also weighed on growth. But until now few surveys have pointed to an outright contraction in the world’s fifth-largest economy.

Britain had been due to leave the EU on March 29, but parliament repeatedly opposed the Brexit deal Prime Minister Theresa May had negotiated with Brussels.

“There were widespread reports that domestic political uncertainty had constrained demand in March, with clients hoping for clarity about Brexit outcomes before committing to new projects,” IHS Markit said.

Late on Tuesday, May said she would seek another Brexit delay to try to reach an agreement with Jeremy Corbyn, the opposition Labour Party leader, a last-ditch gambit to break an impasse over Britain’s departure that enraged many in her party.

Sterling dipped after the PMI release, to $1.3156 compared with $1.3175 beforehand, but it quickly recouped losses as traders focused on the outcome of the talks between May and Corbyn.

A broader PMI released this week, including manufacturing and construction data, also fell to its lowest since July 2016. It escaped outright contraction only because firms bought more raw materials to prepare for a potentially disorderly Brexit.

“A stalling of the economy in the first quarter will... likely turn into a downturn in the second quarter unless demand revives suddenly, which given the recent escalation of Brexit uncertainty, seems highly improbable,” IHS Markit said.

But some economists cautioned that past PMIs had tended to be too downbeat when economic uncertainty has been high.

“GDP growth probably is holding up a little better than the PMIs imply,” said Samuel Tombs at Pantheon Macroeconomics.

Unlike in 2016, when demand rebounded rapidly after the initial shock of the referendum result, British businesses have now reported falling orders for the past three months, the longest such run since the depths of a recession in 2009.

Last week, the head of the British Chambers of Commerce said business was angry with politicians for “chasing rainbows” rather than accepting that some Brexit goals were unrealistic.

And in news likely to depress growth this month, carmakers BMW and Peugeot said May’s delay to Brexit had come too late for them to cancel stoppages at their British factories, which they had planned because of fears of parts shortages after Brexit.

ING’s Smith pointed to further uncertainties, including another extension of the Brexit date. “While this would give firms a temporary reprieve from the ‘no deal’ risk, we suspect companies will continue to make their preparations for this scenario,” he said. “All of this is costly, and we think under the scenario of a long extension, growth would continue to suffer.”

“A drop in service sector activity indicates that UK GDP contracted in March, with the economy stalling over the first quarter as a whole and at risk of sliding into a deepening downturn in coming months,” said Chris Williamson, chief business economist at IHS Markit.

The sector is widely regarded as the engine of the British economy − and any weakness can therefore slam the brakes on growth.

Britain’s economy had already struggled in the fourth quarter of last year, with anaemic economic growth of just 0.2 per cent.

“Both the services and construction sectors are now in decline and manufacturing is only expanding because of emergency stockpiling ahead of Brexit,” said Williamson.

He added that the underlying picture of demand is even worse than the headline numbers suggest.

“Service sector order books have contracted at the steepest rate since the height of the global financial crisis in 2009 so far this year, with companies reporting that Brexit uncertainty has dampened demand and led to cancelled or deferred spending, exacerbating a headwind from slower global economic growth,” he said.

Agencies