The UK’s services sector has contracted for the first time in eight years, according to the latest Business Trends Report by accountants and business advisors BDO LLP.
BDO’s Services Output Index, which measures business output within the sector, plummeted to 94.73 in July from 96.85 the previous month. This decline marks the first time that the services sector has shrunk since February 2010, and pushes the UK’s largest sector beneath the 95.0 point of contraction.
With services accounting for 80 per cent of the value created by the UK economy, this finding paints a gloomy picture for the country’s economic outlook.
Output from manufacturing, the UK’s second largest sector, remains above the long-term growth trend of 100, recording just a small decline from 100.82 in June to 100.16 in July. This indicates a more positive period for manufacturers, with a third of businesses in the sector recording increased orders in the second quarter of the year. However, manufacturing comprises less than one tenth of UK business and is struggling to keep output growth in the green.
The UK’s business output is at its lowest point in six years and also creeping closer to the point of contraction as Brexit paralysis takes its grip. BDO’s Output Index, which measures business output growth in the UK’s two largest sectors, fell to 95.34 in July from 97.29 in June. This marks a significant slide from this time last year, when output stood at 100.96.
These findings emerge against the Bank of England’s decision to raise interest rates by a quarter point to 0.75 per cent last week,putting rates at their highest level for almost a decade.
Despite the fall in output, BDO’s latest report shows that firms remain resilient and are optimistic about the future. BDO’s Optimism Index, which shows how businesses expect output to develop in the next three to six months, increased for the second consecutive month from 101.85 to 101.96. This confidence was likely driven by rising employment figures, as well as the encouraging news in July for future UK and US trade. President Trump and the European Commission President Jean-Claude Juncker committed to reduce tariffs and non-tariff barriers on industrial goods, which is set to improve exporting conditions for UK firms.
Commenting on the Business Trends Report’s findings, Peter Hemington, Partner BDO LLP, said: “Uncertainty about Brexit and the increasing possibility of Britain crashing out of the EU without a transition deal is discouraging businesses from investing in the UK, with a resulting drag on productivity. The Bank of England’s decision to raise interest rates was designed to reduce inflation but has been carried out during a period of immense fragility for British business. I would urge the Monetary Policy Committee to act with caution when it comes to the possibility of any further rate rises.
“The government must also recognise the pressing need to protect Britain’s 26 million services sector workers as Brexit negotiations take place, particularly considering the UK has the highest share of services exports than any leading economy.”
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