UK services sector shrinking for first time in eight years as no-deal Brexit looms, research finds

First decline in services output, which includes retail, banks, hotels and media companies, since February 2010

An index of services output slumped to 94.7 in July from 96.9 the previous month, with anything below 95 indicating the sector is contracting (AFP/Getty)

The UK’s services sector – which makes up more than three-quarters of the economy – has contracted for the first time in eight years, painting a “particularly gloomy outlook” for the country, according to new research.

An index of services output slumped to 94.7 in July from 96.9 the previous month, with anything below 95 indicating the sector is contracting.

It is the first time services, which includes retail, banks, hotels and media companies, among others, have registered a decline since February 2010, said professional services firm BDO, which commissioned the research.

It found that manufacturing, which makes up around one-tenth of the economy, continued to fare better than services in July, recording 100.1 on the index, though this was down slightly from 100.8 in June.

A third of businesses in the sector reported increased orders in the second quarter of the year.

The data, which is compiled by the Centre for Economic and Business Research, aggregated the results of a number of closely-watched business surveys.

It suggests that UK business output is at its lowest point in six years and is edging towards the point of contraction. Output in services and manufacturing combined fell to 95.34 in July from 97.29 in June and from 100.96 12 months ago.

The findings come after the Bank of England chose to raise interest rates this week by a quarter of a point to 0.75 per cent and Brexit negotiations show no signs of moving closer to a resolution.

Liam Fox, the international trade secretary, said on Sunday that the UK was now odds-on to crash out of the EU without a trade deal in March.

Mr Fox told The Sunday Times that likelihood of a hard Brexit in which the UK is forced to deal with the EU and other nations under World Trade Organisation terms was now “60-40”.

Bank of England governor Mark Carney said on Friday that the risk of no deal was now “uncomfortably high”.

Despite the fall in output, the new research found that firms are feeling positive about the outlook for the next three to six months with an optimism index rising slightly from 101.85 to 101.96.

Peter Hemington, a BDO partner, said the prospect of no deal was dragging productivity by discouraging firms to invest in the UK.

“The Bank of England’s decision to raise interest rates was designed to reduce inflation but has been carried out during a period of immense fragility for British business,” Mr Hemington said.

“I would urge the Monetary Policy Committee to act with caution when it comes to the possibility of any further rate rises.

“The government must also recognise the pressing need to protect Britain’s 26 million services sector workers as Brexit negotiations take place, particularly considering the UK has the highest share of services exports of any leading economy.”