Cost inflation and sluggish demand hit UK services

4 September 2019

Business growth in UK services “almost stalled” in August as confidence fell to the lowest in over three years, according to the latest PMI. 

The IHS Markit / CIPS UK Services Purchasing Managers’ Index fell to 50.6 this month, from 51.4 in July and against the 50 no-change value.

Weakening business activity and falling new work intake was linked to “sluggish underlying economic conditions”. 

The survey revealed that firms were affected by sustained Brexit-related uncertainty and “subdued” spending. 

Business sentiment regarding growth in the service sector hit its lowest since July 2016 and indicated the impact of political and economic uncertainty on decision-making, business investments, and client demand. 

The expansion of export work seen in July has slowed. Some firms reported that European clients had delayed new projects due to political uncertainty, while others referred to the weak sterling exchange rate boosting overseas sales.

Service firms' operating margins were also pressured by the sharpest increase in cost inflation since January, following rising fuel costs, utility bills and higher staff wages. 

The report showed backlogged work is in its longest decline since 2011-12, falling for the eleventh month in a row. 

Chris Williamson, chief business economist at IHS Markit, said: "Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers. So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services. 

"After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.

Duncan Brock, group director at the CIPS, said: “The services sector clung on by its fingertips this month remaining just above the no-change mark as domestic and export clients abandoned spending in favour of a wait-and-see approach and the political environment became increasingly murky.

"There was also no respite from the increasingly lacklustre UK economy and sterling’s performance did little to help as service providers reported the fastest rising costs since January for salaries and fuel which they were then unable to pass on. As competition for dwindling orders stepped up, some firms resorted to cutting prices instead to tempt customers through the doors.”

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