Wednesday 3 April 2019 10:25 am

UK services sector shrinks for first time in over two years

The UK’s crucial services sector contracted in March amid widespread reports of Brexit uncertainty constraining demand, bringing to an end over two-and-a-half years of growth.

Aside from a brief dip seen after the European Union referendum, the latest reading of the services purchasing managers’ index (PMI), which gives an overall view of the sector, was the joint weakest over the past decade, it was revealed today.

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A fall in output from the sector, which generates the bulk of Britain’s GDP, will worry policymakers and raise fears of a downturn. However, staff hiring rates and business expectations both improved in March.

Britain scored 48.9 on the IHS Markit/CIPS services purchasing managers' index (PMI), with a score of under 50 indicating contraction. This was well below economists expectations which had foreseen moderate growth and a score of 50.9.

The downturn in the sector’s output reflected a lack of new work to replace completed projects so far in 2019, said IHS Markit and the Chartered Institute of Procurement and Supply (CIPS), who released the data. Export demand was particularly subdued, as highlighted by a drop in new work from abroad.

Ruth Gregory, senior UK economist at Capital Economics, said: “The gloomy tone of March’s Markit/CIPS survey was perhaps not too surprising given that the UK has entered into the most intense phase of Brexit uncertainty.”

“But at this level, the headline PMI is consistent with services sector output contracting at a quarterly rate of around minus 0.1 per cent, compared to quarter four’s 0.5 per cent rise.”

Yet the latest IHS Markit/CIPS survey showed that employment numbers rose in March, following job shedding in the first two months of the year.

The degree of optimism edged up to its highest since rate since last October, with some companies citing hopes of greater clarity about the path to Brexit. The figure remained below long term norms, however.

There were widespread reports that domestic political uncertainty had constrained demand in March, with clients hoping for clarity about Brexit before committing to new projects.

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, called the results “a seriously worrying development”.

He said: “Worried consumers fearful of rising living costs stayed away from discretionary spending and corporate clients held back on major decisions, preferring to defer big ticket projects until the Brexit deadlock is lifted.”

“There was also no respite from strong inflationary pressures as the sector bore the brunt of higher salaries and fuel costs.”

Read more: UK manufacturing hits 13-month high as Brexit stockpiling peaks

Chris Williamson, chief business economist at IHS Markit, said: “A drop in service sector activity indicates that UK GDP contracted in March, with the economy stalling over the first quarter as a whole and at risk of sliding into a deepening downturn in coming months.”

Anthony Kurukgy, senior sales trader at Foenix Partners, said: “Despite showing contraction, today’s data all but confirms data releases are becoming secondary to Brexit headlines with muted sterling reaction.”