Momentum stalls in the dominant UK services sector but price pressures ease

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Service-sector firms report consumers are tightening their belts (Source: Getty)

The UK’s services sector slowed in May to record the weakest expansion since February as momentum stalled in the face of consumer belt-tightening and pre-General Election caution, according to a survey of firms.

The closely followed purchasing managers’ index (PMI) for the service sector dipped more than expected to hit 53.8 in May, after reaching a four-month high of 55.8 in April, according to IHS Markit.

While the measure remained above 50, indicating the sector expanded for the 10th consecutive month, the weaker pace of expansion suggested overall growth in the UK economy could slow.

Read more: UK growth revised down for first quarter to 0.2 per cent

Some economists have a negative outlook for the services sector, which makes up just short of 80 per cent of the UK’s GDP, with slower consumer spending expected to dent activity.

New order growth softened during May, the PMI survey said, with respondents to the survey citing weaker consumer demand as well as delayed decisions ahead of the General Election from some businesses.

The rise of inflation above wages has become one of the most pressing issues for the UK economy in the last year. Inflationary pressure has been boosted by the devaluation of sterling since the EU referendum last June, which makes imports significantly more expensive.

Firms have been forced to choose between passing on the cost increases to consumers or absorbing the rises in their margins in order to protect market share.

Read more: British businesses intend to invest more despite consumer spending slowdown

The PMI reading suggests this has weighed on the services sector, although the extent of any dip in activity could be further underestimated owing to the absence of the retail sector in the survey.

However, the survey gives further weight to the evidence that the inflationary pressure may be easing, as input cost rises moderated further from February’s peak.

Meanwhile prices charged by service-sector firms to customers rose by the slowest rate since November 2016.

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement and Supply, which commissions the survey, said: “The powerhouse driving UK GDP lost some of its force this month, with the weakest performance since February, revealing a fragility out of sync with the other sectors which were fired up and running.

“It was clear that slower new business growth let the side down, impacted by caution around the General Election, and a tightening of purse strings.”

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