Services sector UK services sector flatlines as Brexit fears slow economy
Survey shows companies starting to cut staff in response to a decline in new business
Britain’s pivotal services sector has posted its weakest performance since the immediate aftermath of the EU referendum amid growing signs that Brexit uncertainty has slowed the economy to stall speed.
The latest health check of a sector that accounts for almost 80% of UK output showed services companies starting to reduce staff numbers in response to a decline in new business.
After downbeat news from the manufacturing sectors, the closely watched survey of services from the Chartered Institute of Procurement and Supply (Cips) and IHS Markit heightened concerns that the UK’s planned exit from the EU at the end of March would be accompanied by an economy flirting with recession.
As a result, the pound fell on the currency markets, losing more than a cent against the US dollar to end the day in the City at $1.2930.
With the Bank of England’s nine-member monetary policy committee due to set interest rates on Thursday, analysts said the weakness displayed by the three biggest sectors of the economy meant borrowing costs would be left on hold at 0.75%.
The Cips/IHS Markit purchasing managers’ index fell from 51.2 in December to 50.1 in January, barely above the 50.0 level that marks the cut-off point between growth and contraction.
IHS Markit said its all-sector index – which includes manufacturing, construction and services – fell from 51.5 to 50.3 last month – the second lowest reading since December 2012.
Chris Williamson, the chief business economist at IHS Markit, said: “The latest PMI survey results indicate that the UK economy is at risk of stalling or worse as escalating Brexit uncertainty coincides with a wider slower slowdown in the global economy.
“Service sector growth ground almost to a halt in January, matching similar disappointing news in the manufacturing and construction sectors. The last three months have seen the economy slip into its weakest growth spell for six years, and indicate that GDP likely stagnated at the start of 2019 after eking out modest growth of just 0.1% in the fourth quarter.”
The drop in the services sector PMI came despite the boost to consumers provided by wages rising faster than prices. Annual growth in earnings has pushed above the 3% level in recent months while inflation has dipped to just over 2% – bringing an end to the squeeze on living standards caused by the depreciation of the pound following the referendum.
The survey showed services sector companies becoming more cautious about hiring new staff – casting doubt as to whether the recent record levels of employment will be sustained.
The report said the reduction in employment was only marginal but was still the first reported for more than six years. People leaving jobs voluntarily were not being replaced, it added.
Thomas Pugh, the UK economist at consultancy Capital Economics, said the slowdown in the economy that began in the final quarter of 2018 had worsened in early 2019. “Worries about future demand now appear to be seeping into hiring decisions, which may start to weigh on employment growth,” he said.
“However, if a Brexit deal is agreed, there should be a substantial amount of pent-up demand ready to give GDP growth a boost.”
Latest figures for car sales provided some support to the idea that rising real incomes were helping to offset consumer caution caused by Brexit uncertainty. The Society for Motor Manufacturers and Traders said that while total new car registrations in January were 1.6% lower than a year earlier, sales to individuals were up by 2.9%. In 2018, the average fall was 6.3%.
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