Services sector falls for first time since 2016

3 April 2019

The services sector saw a fall in activity in March as political uncertainty caused corporate clients to delay spending decisions and hold off on new projects, found the latest IHS Markit/CIPS UK Services Business Activity Index (PMI).

The figure for March fell to 48.9, down from 51.3 in February, and lower than the 50.0 figure – which reflects no change – for the first time since July 2016. It is the joint-weakest reading in service sector output in the past decade, according to the IHS Markit/CIPS report.

“A drop in service sector activity indicates that UK GDP contracted in March, and is at risk of sliding into a deepening downturn in coming months,” said Chris Williamson, chief business economist at IHS Markit.

New sales orders have fallen for the third month running, resulting in the longest fall in volumes since 2009, according to the PMI. Reports suggest Brexit has caused clients to be overly cautious and postpone commitments to new projects in the hope of political certainty. Similarly, export demand has been “subdued” as new work from abroad decreased.

Backlogged work decreased for the sixth month running, as reduced capacity enabled volumes of unfinished work to be completed, the report said. And staff recruitment took a positive turn, with a slight increase in employment in March, compared to previous months of job reductions.

The overall rate of inflation of purchased materials and fuels remain unchanged from February’s nine-month low, according to the report. But increased staff wages, transport costs and energy prices have pushed up operating expenses across the services, said survey respondents.

Meanwhile, average prices charged by service providers increased slightly, with the rate of inflation is the slowest since mid-2017. This is due to low demand resulting in “squeezed margins and pressure to match discounting by competitors,” suggest firms.

Duncan Brock, group director at the CIPS, said the results are a seriously worrying development. “Worried consumers fearful of rising living costs stayed away from discretionary spending and corporate clients held back on major decisions, preferring to defer big ticket projects until the Brexit deadlock is lifted.”

He said the sector bore the brunt of higher salaries and fuel costs. “Service providers were unable to pass tehse onto customers, hampered by stiff competition and the threat of discounting to retain market share.

“A fight for survival beckons if this market stagnation becomes entrenched, the global economy remians downbeat and the Brexit cloud is not lifted.”

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