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Services sector slips back amid Brexit vote jitters

Published 05/07/2016

Uncertainty over the referendum sparked the worse-than-expected figures
Uncertainty over the referendum sparked the worse-than-expected figures

Britain's powerhouse services sector slipped back last month as Brexit uncertainty intensified in the weeks leading up to Britain's referendum on the European Union.

The closely-watched Markit/CIPS services purchasing managers' index (PMI) recorded a worse-than-expected 52.3 in June, down from 53.5 in May and below economist expectations of 52.8.

A reading above 50 indicates growth.

Business activity in the services sector matched a 38-month low last seen in April as mounting uncertainty surrounding the EU referendum "weighed on workloads and incoming new business".

The responses were collected between June 13 and 28, with 89% coming in before the referendum result on June 24.

The update from the services sector, which accounts for around 78% of the UK economy, comes on the back of upbeat manufacturing data and a dire performance from the construction industry in the run-up to the Brexit vote.

The manufacturing industry PMI stepped up to a five-month high in June, while Britain's builders saw the construction sector experience its worst month in seven years as Brexit uncertainty triggered a shock contraction.

Chris Williamson, chief economist at Markit, said the string of economic surveys for June pointed to a slowdown in the UK economy.

He said: "The PMI surveys indicate that the pace of UK economic growth slowed to just 0.2% in the second quarter, with a further loss of momentum in June as Brexit anxiety intensified.

"Hiring has also clearly been hit as firms lack clarity on the economic outlook. Business optimism in the vast service sector is down to a three-and-a-half-year low.

"A further slowing, and possible contraction, looks highly likely in coming months as a result of the uncertainty created by the EU referendum.

"However, with the June PMIs having already fallen into territory that would normally be associated with the Bank of England cutting interest rates, it's unlikely that policymakers will wait for more data before unleashing additional monetary stimulus. More policy is therefore likely in the coming weeks."

The study found that the volume of new business picked up slightly last month, but the growth was still the second weakest since the upturn three and a half years ago.

It added that the lack of clarity surrounding Britain's referendum on the EU had led to "postponed or cancelled" orders, while the rate of new jobs slipped to its slowest level since August 2013.

It showed that while business a ctivity rose every month since January 2013, the index averaged at 52.7 in the second quarter, the weakest performance of any quarter since the first quarter of 2013.

David Noble, group chief executive of the Chartered Institute of Procurement and Supply, said: "Uncertainty continued to weigh on the service sector in June with impacts reported on new business and the lowest optimism for future activity for three-and-a-half years.

"The majority of respondents completed the survey before Brexit and attributed these effects to both a general slowing in the UK economy and a pause in normal economic activity as customers and business awaited the results of the EU referendum."

He added: "These subdued figures are a wake-up call to policymakers that fast, decisive action is necessary to prevent further slides in confidence and activity in the key service sector and, by extension, the overall economy."

Economists have been gloomy in their forecasting for the UK economy, with IHS Global Insight cutting its forecasts to 1.5% from 2% for 2016 and to 0.2% from 2.4% for 2017.

Meanwhile, Bank of England governor Mark Carney signalled on Thursday that interest rates could be cut over the summer to bolster the UK economy after the Brexit vote.

He said in his personal view, ''some monetary policy easing will likely be required over the summer'', signalling a rate cut next month or in August.

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