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UK economic activity contracts for first time since 2016

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There was hope from overseas with dovish talk from major central banks and the US and China agreeing a truce in their trade war at the weekend, but it was a poor week for economic data at home.

Business activity in the UK contracted in June, the first time there has been such a broad-based drop in almost three years. The UK composite PMI, which is compiled from data from three PMI surveys covering the manufacturing, con-struction and services sectors, fell from a reading of 50.7 in May to 49.2 in June. Any reading below 50 signifies contrac-tion.

Chris Williamson, chief business economist at IHS Markit, which compiles the various sector PMI surveys, said: "Collec-tively, the PMIs indicate that the economy has slipped into contraction for the first time since July 2016, suffering the second-steepest fall in output since the global financial crisis in April 2009.” The news appears to have confirmed various predictions of a slowdown in the UK economy in the second and third quarters, and markets are now pricing in a 50% chance of an interest-rate cut before the end of the year to help boost business activity and consumer spending.

The manufacturing survey was released on Monday with a reading of 48 for the month of June, down from 49.4 in May. Analysts are now suggesting that manufacturing will fall further next month as Brexit worries suppress production, de-mand and investment. On Tuesday IHS Markit released its construction sector PMI, which revealed activity had fallen to its weakest level in more than 10 years. The index fell to 43.1 in June, the lowest level since April 2009. It was far below the 49.3 level forecast by City economists in a Thomson Reuters poll, and down on the 48.9 reading in May.

“The latest survey reveals weakness across the board for the UK construction sector, with house building, commercial work and civil engineering activity all falling sharply in June,” said Tim Moore, associate director at IHS Markit.

Finally, on Wednesday the IHS/Markit survey for the services sector, which accounts for around 80% of the UK econo-my, showed that it fell to 50.2 in June from a reading of 51 in May. The survey did show an improvement in the pace of employment in the sector, but the fall in productivity was among the worst in the survey’s history.

Taken together the surveys suggest that UK economic growth will be flat in the second quarter and will struggle to improve in the third quar-ter given the broad falls in productivity and new orders.

Also this week, the latest Nationwide House Price Index revealed a downbeat housing market in June, with national aver-age prices rising by just 0.5% compared to the same time last year. This is the seventh month in a row where annualised price increases remained below 1%. In London, the survey showed prices falling, although the pace of decline slowed. In the quarter to June prices fell by 0.7% on an annualised basis, down from a drop of 3.8% in the previous quarter com-pared to the same quarter in 2018.

Overseas, the truce between China and the US was welcomed but a senior Chinese official was reported as saying that a deal was not possible unless the US lifted its existing tariffs on Chinese goods.

 

 


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