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UK services sector hit by growth slowdown in February

Britain's powerhouse services sector saw its weakest growth in nearly three years in February in the latest sign of a slowdown in the UK economy.

The closely-watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 52.7 last month compared to 55.6 in January, its slowest rise since March 2013. A reading above 50 signals growth.

The slowdown was triggered by slower expansion in the volume of new business, with firms seeing clients delaying placing new orders because of fears over global growth, the report said.

But the long-term outlook for the sector stepped up after January's three-year low to the joint strongest in five months, according to the study.

The report on the services sector - which counts for three-quarters of the UK economy - will reinforce expectations that the Bank of England will keep interest rates at 0.5% for at least the remainder of the year after disappointing survey readings for the manufacturing and construction industries earlier this week.

Some economists believe the slowdown in services activity may even strengthen the case for a potential rate cut.

The construction PMI survey on Wednesday showed housebuilding activity in the UK sank to its lowest level for more than two-and-a-half years in February, while Tuesday's manufacturing report revealed the sector was teetering on the brink of stagnation last month after expanding at its slowest pace for nearly three years.

Chris Williamson, chief economist at Markit, said the services slowdown could weaken wider economic growth to 0.3% in the first quarter.

He added: "Despite rising slightly from January's three-year low, business confidence in the service sector remained at a level which has historically presaged an imminent slowing in the economy to near-stagnation or worse in coming months.

"Survey responses reveal that firms are worried about signs of faltering demand, but boardrooms have also become unsettled by concerns regarding the increased risk of 'Brexit', financial market volatility and weak economic growth at home and abroad."

Experts warned the slip for the services sector provides evidence that the UK economy is already suffering from the uncertainty caused by the EU referendum.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The report on services provides the clearest indication yet that uncertainty created by the EU referendum is hurting the economy."

The services slowdown caused the rate of job creation in the sector to tail off for the third time in four months, with employment rising at its slowest pace for two and a half years, the study said.

A reduction in economic growth to 0.3% in the first three months of 2016 would mark a significant drop on the 0.5% seen in the fourth quarter of 2015, which was bolstered by a robust services sector.

The Office for National Statistics said last month that services output grew by 0.2% during December 2015, with output for November being revised up from 0.2% to 0.3%.

Howard Archer, chief European and UK economist at IHS Global Insight, said the data was a "hammer blow to UK GDP growth prospects in the first quarter of 2016".

Alan Clarke, head of European fixed income strategy at Scotiabank, said the survey results could lead the Bank of England to consider a cut to interest rates.

He added: "The survey is in rate-cut territory now. I don't believe for one minute that a rate cut will make any difference. The pound is already under pressure and household disposable incomes are very robust."

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