Services sector activity hits lowest level since Brexit vote
It is the weakest service sector performance since July 2016, according to a survey.
Activity in Britain’s services sector sunk to it lowest level since the Brexit vote as bad weather and economic uncertainty took their toll.
The closely watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 51.7 in March, down from 54.5 in February and missing economists’ expectations of 54.0.
A reading above 50 indicates growth.
It is the weakest service sector performance since July 2016, according to the survey.
Businesses were disrupted by unusually bad weather that included snow last month, which contributed to subdued consumer spending.
“Heightened economic uncertainty” also affected the service sector, acting as a “brake on growth”, the report said.
It marks further bad news for the UK economy after separate PMI data earlier this week showed a contraction in the construction sector and only a marginal month-on-month improvement in manufacturing.
Chris Williamson, chief business economist at IHS Markit, which compiles the survey, said: “The UK economy iced up in March, suffering the weakest increase in business activity since the Brexit vote amid widespread disruptions caused by some of the heaviest snowfall in years.
“As a result, first-quarter economic growth will likely have been adversely affected.
“The PMI surveys collectively signal a quarterly GDP growth rate of just under 0.3%, down from 0.4% in the fourth quarter, albeit with the rate of growth sliding to just 0.15% in March alone.”
Services companies suffered the slowest rise in new business volumes for 20 months, the latest survey showed.
On top of bad weather, respondents cited subdued consumer demand and reported that Brexit-related uncertainty had led to clients delaying their decision making and taking fewer risks.
Employment in the sector increased at a “moderate pace” which was the slowest seen so far in 2018, with some businesses pointing to tight labour market conditions and difficulty filling vacancies.
Those firms that did hire extra staff said they were trying to boost operating capacity or were working towards long-term expansion plans.
Delays in staff recruitment contributed in part to a rise in work backlogs, though that was primarily linked to the weather-related disruption.
Businesses also suffered another sharp rise in costs, with higher staff salaries, utility bills and raw materials like food and drink resulting in the strongest inflation rate for three months.
While firms are optimistic about business activity prospects over the next 12 months, the survey showed that the degree of positive sentiment was the lowest since June 2017 – with economic uncertainty dragging on confidence.
Policymakers will likely choose to look through this latest data when they meet next in May. James Smith, ING developed markets economist
Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), said it there was “not much to be enthused about.”
“But the question remains whether this will be a sign of a more entrenched slowdown or whether the unpreparedness for unseasonal weather conditions was the root cause.
“As further rises in cost burdens for the sector seem inevitable, and the Brexit shadow remains, there will have to be an injection of confidence and stronger economic performance next month to conclude March was just a glitch.”
James Smith, a developed markets economist at ING, said that the weather-related hit is unlikely to spook interest-rate setters at the Bank of England.
“In reality, this means that policymakers will likely choose to look through this latest data when they meet next in May.
“Instead, the recent acceleration in wage growth, coupled with the agreement of a post-Brexit transition period, will be what counts for policymakers.
“We continue to expect a rate hike in May, and markets seem to be pretty much on-board with this idea too.”