Belfast Telegraph

Pound falls further as rising costs see slowdown in service sector

The pound fell to a near-seven week low as Britain's powerhouse service sector suffered a slowdown amid cautious consumer spending and a steep rise in costs linked to sterling's collapse.

The closely watched Markit/CIPS services purchasing managers' index (PMI) fell to 53.3 in February, down from 54.5 in January, and below economists' forecasts of 54.1.

A reading above 50 indicates growth.

It marked the slowest rate of expansion since September last year and caught currency markets by surprise.

The pound fell to a near-seven week low against the US dollar to trade at 1.222, and dropped 0.6% versus the euro to a near-one month low of 1.160.

The services industry - which accounts for nearly 80% of UK economic growth - was stung in part by a rise in operating costs which rose at their steepest pace in eight-and-a-half years on the back of a weaker pound.

Businesses subsequently raised their own prices to try to offset those operating costs.

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply (CIPS), said: "Exchange rate depreciation, rising energy costs and higher wage bills all had a profound impact on prices charged inflation, which was the highest since September 2008."

The pound has dropped more than 18% against the US dollar and 10% against the euro since the Brexit vote, increasing the cost of imports and subsequently driving up business input costs.

Sterling's collapse has already pushed inflation to a two-and-a-half-year high of 1.8%, with economists predicting a further rise towards 3% later this year.

The survey said firms observed more "cautious spending" among consumers in February, but Mr Brock said that did not stop businesses from bumping up prices tags in preparation for further cost pressures.

"This will have policymakers wondering whether consumers can continue spending as Brexit negotiations approach, or whether they rein back further in response to squeezed household budgets," he said.

But businesses are still optimistic despite cost pressures, with confidence about activity levels "little-changed" from January's post-referendum peak.

Job creation in the service sector rose at a "moderate pace", and was driven by long-term expansion plans, higher workloads and product development - though hiring was subdued compared to the four-year trend.

Firms said they were positive about the sustained improvement in economic conditions, and were hoping that the near-term impact of Brexit jitters on client demand would be limited.

But businesses are still worried that higher inflation and business costs might constrain growth this year.

Chris Williamson, chief business economist at IHS Markit, said: "A further slowdown in UK business activity growth in February adds to evidence that the economy has lost momentum after the impressive expansion seen at the end of last year.

"The PMI surveys are collectively signalling GDP (gross domestic product) growth of 0.4% in the first quarter."

That would mark a notable slowdown from 0.7% in the final four months of 2016.