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Lacklustre services sector growth suggests slowdown in UK economy, says report

Published 05/04/2016

Expansion in the services sector over the first three months of this year is the weakest it has been for three years
Expansion in the services sector over the first three months of this year is the weakest it has been for three years

Sluggish growth from Britain's powerhouse services sector has pointed to a slowdown in the UK economy, according to a report.

The closely watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 53.7 last month, improving on the near three-year low of 52.7 seen in February. A reading above 50 signals growth.

But the pace of growth was dragged down by concerns over the gloomy outlook for the global economy and fears that Britain could vote to leave the European Union, the report found.

It said the lacklustre performance from the services sector - coupled with flagging growth in the construction and manufacturing industries - suggested gross domestic product (GDP) had slowed in the first quarter of 2016 to 0.4%, down from 0.6% in the fourth quarter of last year.

Expansion in the services sector over the first three months of this year is the weakest it has been for three years, while new business rose by its slowest rate since January 2013, according to the study.

It said growth was likely to remain "subdued" heading into the second quarter of this year.

The report on the services sector - which accounts for three-quarters of the UK economy - will reinforce expectations that the Bank of England will keep interest rates at 0.5% for a while longer.

Some economists believe the sluggish growth from services may strengthen the case for a potential rate cut.

The construction PMI on Monday showed housebuilding activity grew at its slowest pace for more than three years in March, while Friday's manufacturing report revealed the sector was stuck in the "doldrums" and close to three-year lows last month.

Chris Williamson, chief economist at Markit, said its recent surveys point to a slowdown in the UK economy.

He added: "Business confidence remains in the doldrums as concerns about the global economy continue to be exacerbated by uncertainty at home, with nerves unsettled by issues such as Brexit and the prospect of further Government spending cuts announced in the Budget.

"It therefore seems unlikely that March's upturn in the pace of growth represents the start of a longer-term upswing. In contrast, the survey data suggest growth is more likely to weaken further in the second quarter.

"With the PMI already in territory traditionally associated with the Bank of England choosing to loosen policy, interest rate hikes seem a long way off."

Howard Archer, chief UK and European economist at IHS Economics, said: "The surveys will likely maintain belief that there is a possibility that the Bank of England's next move could end up being to relax monetary policy.

"Of course, June's looming referendum on UK membership adds substantially to the uncertainty outlook for monetary policy."

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