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Services sector regains some strength but Brexit worries hit activity

Published 03/06/2016

Figures show Britain's services sector regained some strength last month
Figures show Britain's services sector regained some strength last month

Britain's services sector regained some strength last month, but remained under pressure as Brexit fears hit activity.

The closely-watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 53.5 in May, up from 52.3 in April when activity rose at its slowest pace for more than three years.

A reading above 50 signals growth.

But despite picking up speed, output still expanded at one of the weakest levels seen in the sector for the past three years.

The update comes amid a string of lacklustre performances from the UK economy in May, with modest growth in manufacturing and a slowdown from construction.

Chris Williamson, chief economist at Markit, said: "The PMI surveys show that the pace of economic growth remained subdued in May, as Brexit worries exacerbated existing headwinds. The data so far indicate that the second quarter is likely to see the economy grow by just 0.2%."

He added: "Uncertainty caused by the possibility of Brexit has already had a detrimental impact on one-in-three companies, meaning growth could rebound in the event of a Remain win.

"However, the extent of any revival may be limited by weak underlying demand: May also saw widespread ongoing concerns about the fragility of demand both at home and abroad."

David Noble, group chief executive officer at the Chartered Institute of Procurement & Supply, said referendum uncertainty and the impact of the National Living Wage had put the sector on course for its slowest quarter since the beginning of 2013.

The report revealed that firms in the services sector continued to create new jobs last month, with employment rising for the 41st consecutive month.

However, employment growth fell back to its slowest pace since August 2013, with the impact of the National Living Wage causing some firms to hold back from hiring.

It added that 28% of companies said their current business was being hit by uncertainty surrounding the EU referendum, while 9% said it had "strongly" impacted their business and 51% were unaffected.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the report showed the UK economy was "slowing sharply" in the second quarter amid concerns over Brexit.

He added: "Around one third of services firms reported demand had been detrimentally affected by uncertainty about the outcome of the referendum, in line with the proportion of manufacturing and construction firms.

"This, alongside the rise in the business expectations balance to a 10-month high, indicates that activity will pick up after a 'Bremain' vote."

Howard Archer, chief European and UK economist at IHS Economics, said: " Despite some improvement compared to April, this is still a pretty lacklustre survey that points to muted services activity.

"While the survey may help to alleviate fears that the UK economy could stagnate in the second quarter amid heightened uncertainty ahead of the EU membership referendum, it still looks likely that UK GDP growth will be no better than 0.3% quarter-on-quarter in the second quarter, which would be the weakest performance since the fourth quarter of 2012."

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