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Economy at risk of 'decline' amid Brexit uncertainty

Sky News logo Sky News 05/12/2018 James Sillars, business reporter
a group of people walking in the rain holding an umbrella: Shoppers and services businesses are watching their spending as they await the outcome of Brexit © PA Shoppers and services businesses are watching their spending as they await the outcome of Brexit

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The UK economy is at risk of contracting as Brexit uncertainty left output "flatlining" in November, according to a key activity report.

The IHS Markit/CIPS UK services purchasing managers' index (PMI) showed a reading of 50.4 last month, lower than the 52.2 recorded in October.

Any reading above 50 indicates growth but its authors said it meant output in the dominant service sector was at its weakest since July 2016 - the immediate aftermath of the shock Brexit result.

The measure was significantly worse than economists had expected though there was little reaction on financial markets.

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The report said that, taken with its earlier findings on manufacturing and construction activity, the UK was on course to generate GDP growth of just 0.1% in the final quarter of the year.

That would represent a significant slowdown on the July-August period when output was initially measured at 0.6% - aided by good summer weather which helped consumer spending to pick up.

But the official ONS figures also pointed to weakness in September as the clock ticked down to March 2019 when the UK is due to leave the EU.

The latest PMI reading pointed to a collapse in confidence among both consumers and services businesses - building on other evidence of a slowdown from confidence and retail indicators.

They have showed deep reluctance to part with cash or invest while the Brexit outcome is unresolved.

A political crisis for the prime minister in the Commons over her Brexit deal with Brussels has raised uncertainty in the past 24 hours to the extent it may result in Brexit being shelved.

The PMI showed optimism among service sector firms at its worst since the referendum, adding that pressures in the world economy from the US trade war with China also weighed.

The Bank of England is watching confidence indicators closely - having said it could raise interest rates in the event of a hard Brexit to help cool price increases from any collapse in the value of the pound.

A separate study it completed for MPs warned such a scenario could lead to house prices falling by 30%, unemployment nearly doubling and inflation spiralling to 6.5%.

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Chris Williamson, chief business economist at IHS Markit, said: "A sharp deterioration in service sector growth leaves the economy flatlining in November as Brexit concerns intensified.

"Measured across services, manufacturing and construction, the survey results suggest that the pace of economic growth has stalled.

"With the exception of July 2016, when business slumped in the immediate aftermath of the EU referendum, November saw the worst performance since February 2013.

"A contraction of service sector business activity in November was only avoided by firms working through backorders to an extent not exceeded since 2009.

"As such, unless demand revives, a slide into economic decline at the turn of the year is a distinct possibility."

Ruth Gregory, senior UK economist at Capital Economics, said the data was disappointing and warned: "Unless there is a particularly strong bounce back in December, GDP growth of 1.3% seems likely over 2018 as a whole, the weakest since the financial crisis."

Related: Facts to know about Brexit (Photos)

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