UK services sector growth at three-year low

5 May 2016

Growth in the UK services sector last month was the weakest in more than three years, according to new figures.

The latest PMI survey data from Markit and CIPS said the rate of expansion in the sector in April slowed for the third time in the past five months, to the weakest since February 2013.

New business growth picked up slightly but remained relatively subdued, and business optimism was the joint-weakest in over three years, the survey said. It also suggested that the forthcoming EU membership referendum had added to economic uncertainty, with some firms mentioning the delayed placing of new contracts by clients.

The data also signalled the strongest upward pressure on input prices since January 2014, linked to the introduction of the national living wage.

The Markit/CIPS UK Services Purchasing Managers' Index, designed to track changes in total UK services activity compared with one month previously, fell from 53.7 to 52.3 in April, the lowest since February 2013. The index has averaged 55.2 since it started in July 1996. However, the current 40-month run of uninterrupted growth is the second-longest registered over the survey history.

Although service sector employment continued to expand in April, with the rate of job creation remaining above the long-run survey average, the pace of growth was the weakest in over two-and-a-half years.

The outlook remained relatively subdued with market sentiment the joint weakest in over three years as firms continued to report an undercurrent of market uncertainty, the survey said.

The rate of inflation hit a 27-month high, with firms also linking cost pressures to rising fuel prices and the impact of the weaker pound. However, input cost inflation remained below the long-run survey average, and firms raised their own prices at a subdued pace.

Chris Williamson, chief economist at Markit, said that the slowdown in the service sector followed similar weakness in manufacturing and construction to make a ‘triple-whammy’ of disappointing news.

“The PMI surveys are collectively indicating a near-stalling of economic growth, down from 0.4% in the first quarter to just 0.1% in April,” said Williamson.

He added: “The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or through non-standard measures such as QE.”

David Noble, group CEO, CIPS, said that the UK’s services sector was stuck between a rock and a hard place.

“Mounting global economic uncertainty at the top of the supply chain and the reality of the new national living wage at the bottom mean that firms are feeling the pinch from both ends,” he said. “As a result, the sector credited with being the main driver of the UK’s economic fortunes appears to be slowing down.”

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