UK's dominant services sector slips to slowest growth in 11 months

Jasper Jolly
Follow Jasper
Consumers In The Christmas Eve Retail Rush
Consumer services have felt the squeeze from real wage falls (Source: Getty)

Growth in the British services sector slowed to an 11-month low in August, according to a closely watched indicator, raising doubts over the strength of the UK economy.

The purchasing managers’ index (PMI) for the sector fell to 53.2 points in August, according to data giant IHS Markit. While analysts had expected a fall in the indicator, from 53.8 in July, the performance was significantly worse than the 53.5 reading expected.

That represented the weakest rise in business activity in the sector since September 2016, despite job creation continuing to strengthen, reaching a 19-month high.

Read more: Profits squeezed but volumes up in dominant services sector

New orders and activity both expanded during August, but at slower rates. Input cost pressures rose at the fastest rate since February, with further headwinds expected after recent falls in the value of sterling against the surging euro.

Survey respondents reported "subdued client demand and heightened uncertainty about the domestic economic outlook", according to IHS Markit.

The dominant services sector has been the main driver of growth in the UK economy in recent quarters. Services account for almost 80 per cent of British economic output, while the sector was easily the strongest performer in the second quarter of 2017, compensating for a slump in production and construction.

However, concerns over the outlook for the sector have risen in recent months as inflation outpaced wage increases. That has squeezed households' purchasing power, dragging on the profits of consumer-facing firms in particular.

The PMI surveys revealed a "summer slowdown" in the British economy, according to Chris Williamson, chief business economist at IHS Markit, with the weakest overall expansion for six months.

"Momentum is being gradually lost," he said.

“Robust manufacturing growth means the economy may be rebalancing towards goods production, aided by the weaker pound, but the slowdowns in services and construction send warning signals about the health of the economy."

The slower expansion comes with Brexit negotiations running in earnest. Services firms, including the City's financial services, are still awaiting a paper from the government setting out its position on post-Brexit trade, but have so far been left "in the dark", according to the City of London Corporation.

That uncertainty is weighing on large, longer-term investments, according to Chris Sood-Nicholls, head of global services at Lloyds Bank Commercial Banking.

"Amid mixed economic signals, Brexit brings an added layer of complexity and uncertainty, with many investment decisions going on hold," he said.

Read more: Government slammed for forcing City firms to plan for Brexit "in the dark"

Related articles