(Bloomberg) -- The U.K. economy probably shrank for the first time since 2012 in the second quarter as Brexit uncertainty and fears for the global outlook took their toll on output in June, according to IHS Markit.
The report comes a day after Bank of England Governor Mark Carney warned of damage to the global economy from rising protectionism, adding that the U.K. faces the additional threat of a no-deal Brexit on business investment.
Concerns over a chaotic departure from the European Union, along with bets that central banks around the world will need to ramp up stimulus, have left investors fully pricing in a BOE interest-rate cut by August 2020.
The Purchasing Managers Index on Wednesday showed U.K.’s dominant services sector all but stagnated last month, following surveys earlier this week showing outright contraction in the manufacturing and construction industries.
That left a composite gauge covering the three sectors below 50 for the first time since the aftermath of the Brexit referendum in 2016, with the evidence suggesting the economy shrank 0.1% in the second quarter, Markit said.
“The worsening picture will put further pressure on the Bank of England to add stimulus,” said Chris Williamson, chief business economist at IHS Markit. “For policy makers not loosen policy with the all-sector PMI at its current level would be unprecedented in the survey’s two-decade history.”
Markit’s index for the services industry fell to 50.2 in June, down from 51 the previous month and defying economist expectations for no change. The pound fell for a third day after the report, and was 0.1% lower at $1.2576 as of 9:47 a.m. London time.
What Our Economists Say:
“The survey corroborates our view that the economy will contract in 2Q. We forecast sluggish growth in 2H, although the survey adds a downside risk to that estimate.”-- Dan Hanson, Economist. Click here for the full U.K. REACT
Average selling prices for goods and services rose at one of the slowest rates seen in the last three years, boding ill for corporate profits, Markit said. While output struggled, employment continued to rise, suggesting the biggest decline in productivity since the survey began, the firm said.
Business may continue to struggle in the third quarter, as sentiment about the year ahead remains “worryingly subdued.”
Carney said Tuesday that the “intensification of trade tensions has increased the downside risks to global and U.K. growth,” citing falling business confidence and pessimism among households. The BOE sees growth flat-lining in the second quarter.
