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Brexit fears could see UK growth grind to a halt

Published 05/05/2016

Uncertainty ahead of the EU referendum could see UK growth grind almost to a halt
Uncertainty ahead of the EU referendum could see UK growth grind almost to a halt

Uncertainty ahead of the EU referendum could see UK growth grind almost to a halt after figures showed service sector activity rose at its weakest pace for more than three years last month.

In a "triple whammy" of gloom on the economy, the closely-watched Markit/CIPS services purchasing managers' index (PMI) recorded a worse-than-expected reading of 52.3 - down from 53.7 in March and the lowest since February 2013.

It follows surveys earlier this week revealing dismal conditions in the other main sectors of the economy amid fears over a Brexit and uncertainty caused by the EU vote, with a shock contraction in manufacturing activity and a marked slowdown in construction.

Chris Williamson, chief economist at Markit, said the three PMI surveys signalled UK growth near-stalling, to 0.1% in April from 0.4% in the first three months of 2016.

David Noble, group chief executive at the Chartered Institute of Procurement & Supply (CIPS), said: "The looming EU referendum has had a profound effect on the (services) sector, keeping prices relatively stagnant and delaying new orders."

The early timing of Easter and colder weather this spring, as well as global growth jitters may also have hit the dominant services sector, according to the report.

Economists said the PMI surveys suggest growth overall in the second quarter may slow to around 0.2%, which would be the weakest growth since 2012.

The service sector data is seen as key to gauging the overall health of the UK economy, as it accounts for more than three quarters of gross domestic product.

It showed n ew business levels in the services sector rising only slightly last month, remaining at the second-weakest in over three years.

Firms in the service sector are also being squeezed by the recently introduced National Living Wage, which saw the strongest upward pressure on input prices since January 2014, according to the report.

But it revealed firms raised their own prices at subdued levels.

Recruitment among services firms was likewise hit, falling to a low of more than two-and-a-half years.

The PMI results will be scoured closely by Bank of England policymakers ahead of next week's inflation report and interest rates decision.

Mr Williamson said: "The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or through non-standard measures such as quantitative easing."

James Smith, an economist at ING, said the outlook for interest rates would now depend largely on the outcome of the referendum, with a Brexit vote likely to see the Bank loosen monetary policy, but a vote to remain putting a hike back on the cards.

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