The closely-watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 47.4 in July, down from 52.3 in June – the biggest monthly fall in activity on record. A reading above 50 signals growth.
It marked the first contraction in the services sector since December 2012 and the steepest rate of decline for more than seven years, while the month-on-month drop was the worst since records began in July 1996.
The dismal performance from the service sector – which accounts for more than two thirds of the overall economy – points to a 0.4% fall in gross domestic product (GDP) in the third quarter after surveys for the manufacturing and construction sectors also showed falling activity.
Chris Williamson, chief economist at Markit, warned there was “undoubtedly” a higher risk of recession in the UK – two quarters in a row of falling GDP – after the all-sector PMI reading showed a record fall from 51.9 in June to 47.3 in July.
He said: “It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn.
“However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.”
The dire PMI readings mean a cut in interest rates in Thursday’s decision by the Bank of England is now a “foregone conclusion”, according to Mr Williamson.
Policymakers are widely expected to slash rates to a new historic low of 0.25% from 0.5%, while also potentially launching further economy-boosting measures to ward off the threat of recession.
A report from influential think-tank the National Institute of Economic and Social Research (NIESR), also out on Wednesday, warned there was a 50/50 chance of a recession over the next 18 months.
Jack Meaning, a research fellow at NIESR, said the Bank needs to use a “sledgehammer” to offset a deepening downturn in the economy following the vote to leave the EU.
It is predicting g rowth will hit 1.7% overall this year with a decline of 0.2% in the third quarter and risk of “further deterioration”, while GDP will slow to 1% in 2017 while inflation is forecast to reach more than 3%, according to its analysis.
The services PMI figures show activity in the sector going into reverse after three and a half years of growth.
David Noble, group chief executive at the Chartered Institute of Procurement & Supply (CIPS), said “Brexit contagion” had hit new orders and left overall output at rates last seen during the financial crisis.
The survey signalled incoming new business declined for the first time since the end of 2012, while there was a fourth successive month-on-month reduction in the volume of outstanding business in the sector.
Hiring was also put on hold last month after three and a half years of rising service sector employment.
The weaker pound contributed to a three-month high for cost pressures in the sector, although firms have so far held off from passing this on to customers, with prices increasing at the slowest rate in five months.
Services firms are bracing themselves for worse to come, according to the survey, which showed a record drop in business confidence for the year ahead and optimism at its lowest level since February 2009.
Experts at Barclays Research said the PMI reading “underscores our call that the Bank of England’s Monetary Policy Committee is likely to materially ease monetary policy at the MPC meeting tomorrow”.
They are predicting “referendum shock” to trigger a technical recession, with GDP declining by 0.4% in the third quarter and 0.3% in the final three months of the year before “stabilising into a prolonged and shallow contraction”.