Confidence in the UK services sector dropped sharply in August, with firms now more pessimistic about the coming 12 months than at any point since the June 2016 Brexit referendum.
The dent to optimism primarily reflects “concerns about the impact of domestic political uncertainty on client decision-making,” said IHS Markit, a research firm that compiles the services sector purchasing managers’ index (PMI).
Warning that the headline PMI figure, which fell to 50.6 in August, raised the likelihood of a recession in the UK, IHS Markit said that similar readings from other sectors indicated that the UK economy may have shrunk by 0.1% in the third quarter.
“Reports from survey respondents cited a sustained headwind from Brexit-related uncertainty and subdued corporate spending,” the firm noted.
The headline figure came below market expectations of 51.0, and well below the 51.4 seen in the previous month.
The reading means that the services sector had only a “marginal expansion” in output in August, IHS Markit said.
The services sector had gained some ground in July, when the headline PMI reading hit a nine-month high.
Optimism fell for the third month in a row, with IHS Markit saying that the degree of confidence in sectoral growth was “now the lowest for just over three years”.
“Survey respondents widely commented on concerns that domestic political and economic uncertainty would have a negative impact on business investment and client demand,” it said.
The data also revealed “intense pressure” on operating margins at services sector companies, which was driven by higher wages and utility bills, and rising fuel costs.
But firms were not able to increase prices to mitigate the increase in costs do to “intense competition,” IHS Markit noted.
“So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services,” said Chris Williamson, the chief business economist at IHS Markit.
Wednesday’s reading from the services sector follows dire ones from the construction and manufacturing sectors.
The headline construction PMI fell for a fourth month in a row in August, and dropped at the fastest rate in more than a decade.
Meanwhile, new orders in the manufacturing sector plunged at their fastest rate in more than seven years, with business confidence hitting a record low.
“After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession,” said Williamson.
“While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn,” he said.