UK economy heading for double-dip recession as summer recovery stalls

The British economy is on course for a double-dip recession this winter, according to data showing growth slowing down in the UK’s dominant services sector last month.

The latest IHS Markit/Cips monthly survey of the services sector, which accounts for three quarters of economic activity, showed that a recovery over the summer stalled in October, heaping further pressure on the Bank of England to boost its stimulus programme when officials meet this week.

The central bank’s monetary policy committee meets on Thursday to consider a big injection of funds to support the economy. While this was considered an unlikely prospect only a few weeks ago, most City analysts have predicted a £100bn increase in quantitative easing (QE), where the bank pumps money into the economy by acquiring government debt from financial institutions.

IHS Markit said several months of falling consumer confidence, which has tracked the rise in the number of Covid-19, cases cut demand for hotels and restaurants while the government’s policy of tiered lockdowns effectively halted a return to the office across much of the UK.

The purchasing managers’ index (PMI) for the services sector – which encompasses a range of industries from retail to hospitality and financial services – dropped to 51.4 in October, from 56.1 in September to come in below the consensus of City analysts and an earlier flash estimate of 52.3. The composite PMI, which includes the manufacturing sector, declined to 52.1, from 56.5 in September.

Tim Moore, IHS’s economics director, said the data, which was collected between 12 and 28 October, before the second nationwide lockdown was announced, showed the economy “seems on course for a double-dip recession this winter and a far more challenging path to recovery in 2021”.

Two successive quarters of negative growth – which occurred in the first six months of 2020 – constitute a recession, with the term “double-dip” used to describe two downturns in quick succession.

The PMI report said employment across the services sector declined for the eight consecutive month, while customer-facing service providers, especially those in hotels, restaurants and catering, suffered a slump. New orders fell for the first time since June.

“A lack of forward bookings in parts of the economy most affected by lockdown measures led to widespread reports of redundancies and another sharp fall in total employment numbers during October,” Moore said.

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said: “Markit’s survey suggests the recovery essentially ground to a halt in October.”

He said the impact would be revealed in lower GDP growth, which would stay about 8% below its pre-Covid peak by the end of the year.

October marked a turning point on several fronts, he said, arguing that a sharp drop in the use of public and private transport and a slump in demand for discretionary consumer services contributed to a broader slowdown.

“The second wave of Covid-19 is the obvious driver of the slowdown, though the recovery likely would have decelerated anyway, given that pent-up demand after the first lockdown ended temporarily pushed activity in the consumer services sector above its sustainable level over the summer.”

Howard Archer, the chief economic adviser to the EY Item Club, said: “There seems little doubt that a renewed national lockdown will cause the economy to contract again in the fourth quarter – and, very possibly, by an appreciable amount.”

The EY Item Club’s initial forecast is that there could be a GDP contraction of 5-8% in the fourth quarter.

Citing the uncertainty over the UK’s Brexit negotiations, Archer added: “Even before a new national lockdown in England – as well as varying measures announced so far in Scotland, Wales and Northern Ireland – the fourth quarter was looking much more challenging for the UK economy, and it was likely there would be a marked rise in unemployment as the furlough scheme drew to a close in October, even allowing for the government’s latest, more generous job support measures.

“On top of that, business caution has been added to by uncertainties over whether the UK and EU will reach a trade agreement by 31 December.”

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