The biggest part of the UK economy shrinks as election and Brexit loom

Tom Belger
Finance and policy reporter
Shoppers in Glasgow. The biggest part of the UK economy is struggling. Photo: PA

The biggest part of the UK economy has continued to shrink as uncertainty heightens ahead of a general election and Britain’s departure from the European Union.

A closely watched private sector survey published on Tuesday paints a bleak picture of growth in the services industry, as “domestic political uncertainty once again led to cautious business and consumer spending.”

The services sector makes up around four-fifths of Britain’s economy and includes everything from retail and leisure to financial and professional services.

Business leaders reported a third month of falling new work and the sharpest monthly drop since July 2016, the month after the EU referendum.

READ MORE: ‘Downhill course’ for construction sector ahead of general election

But warning signs over the state of the economy have not featured significantly in the election campaign over the past month, with Brexit and public services dominating the political agenda.

Firms said they were holding off on new projects until the country’s future becomes clearer, but optimism that circumstances would improve was its highest since July.

The headline figure for the past month came in at 49.3 on the services purchasing managers’ index (PMI), compiled by IHS Markit and the Chartered Institute of Procurement and Supply (CIPS).

PMIs measure company activity and future plans, and are closely watched as a sign of business sentiment. The readings are on a scale of 1 to 100, with anything above 50 signalling growth in activity and anything below signalling contraction.

It marks the third month the sector has failed to grow, but the reading was better than a preliminary reading of 48.6.

IHS Markit said it suggested Britain’s economy as a whole is contracting 0.1% in the quarter. It comes a day after similar figures for the construction sector showed it was also shrinking, with a reading of 45.3.

Manufacturing sector PMIs, also published this week, recorded the seventh straight month of contracting activity and the steepest decline in jobs in the sector for seven years.

READ MORE: Economic success and a tech boom fuels housing crisis in leading cities

Duncan Brock, group director at the CIPS, said: “As Brexit nerves continued to affect domestic client decision-making, a veil of silence also descended over European clients in particular who were reluctant to commit until there is more clarity in the UK’s future direction.

“Despite this stagnation, a chink of light emerged amongst the services gloom as optimism for the future was the brightest since July 2019. With the advent of the New Year, firms were in a more hopeful mood that the trading landscape had to improve in 2020."