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Britain’s services sector suffers its biggest slowdown since Brexit vote in 2016 as foul weather and ‘economic uncertainty’ take their toll

BayRadio | April 6, 2018
  • The PMI recorded a reading of 51.7 last month, down from 54.5 in February
  • Construction sector also suffered biggest slowdown since July 2016 in March 
  • Manufacturing sector picked up last month, but suffered quarterly contraction

Activity across Britain’s services sector slumped to its lowest since July 2016 last month, the closely watched Markit/CIPS services purchasing managers’ index reveals.

The PMI recorded a reading of 51.7 in March, down from 54.5 in February and well below economists’ expectations of 54.0. A reading of 50 or above indicates growth.

‘Snow disruption and unusually bad weather’ hampered growth in the sector last month, as did ‘heightened economic uncertainty’, the survey’s authors claim.

Separate data published by Markit/CIPS earlier this week revealed a slowdown in the construction sector last month and only a marginal month-on-month improvement in manufacturing.

Commenting on today’s service sector results, Chris Williamson, chief business economist at IHS Markit, 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.’

While growth in the sector subsided,input cost inflation remained ‘strong’ and operating expenses grew at their fastest pace since December 2017.

With operating expenses on the up, last month saw a ‘marked rise’ in average prices charged by companies in the sector, the survey said.

While chugging along at the slowest pace since the start of the year, recruitment in the services sector is still said to be growing at a ‘moderate pace.’

Companies reporting a rise in staffing levels generally cited efforts to boost operating capacity and long-term expansion plans.

But, some companies said tight labour market conditions had led to difficulties filling vacancies.

Looking ahead, firms in the sector remain ‘optimistic’ about their prospective activity levels over the next year, even though ‘the degree of positive sentiment eased to its lowest since June 2017.’ Economic uncertainty remains a key concern.

Sterling traded near its lows of the day after the release of the survey. The pound was recently off 0.31 per cent against the US dollar at $1.4039.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: ‘Momentum stalled in March as the Beast from the East struck again causing consternation with the slowest new order growth for 20 months and impacting on overall business activity.

‘As UK services remains the largest driver of economic growth, the triple force of snow, inflation and Brexit-related uncertainty struck at the sector’s heart, as consumer buying dwindled, bad weather halted business operations and optimism was at its lowest ebb since June 2017.’

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.

He said: ‘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.’

Construction sector growth slowing

The services sector is not the only sector that suffered a slowdown last month.

Earlier this week the Markit/CIPS construction survey revealed that growth in the sector slumped to its lowest since July 2016 last month.

Again, ‘unusually bad weather’ was blamed, hitting engineering projects particularly hard.

The overall reduction in construction output was driven by the sharpest drop in civil engineering work for five years in March.

The IHS Markit/CIPS UK Construction PMI fell from 51.4 in February to 47.0 in March, to register below the 50.0 no-change threshold for the first time in six months.

Higher raw material costs continued last month, which construction firms linked to increased prices for metals and insulation.

Tim Moore, Associate Director at IHS Markit and author of the IHS Markit/CIPS Construction PMI, said: ‘The construction sector continued to experience subdued business conditions during March, but snow-related disruption was a key factor behind the marked decline in activity on site reported by survey respondents.

‘Total construction output fell at the fastest pace since July 2016, driven by the sharpest reduction in civil engineering activity for five years and a renewed fall in commercial work.

‘House building increased slightly during March, although the rate of expansion was still softer than at any time in 2017.’

Manufacturing on the up – but only just

While the crucial readings for the services sector and construction are on the slide, the manufacturing sector saw slight growth last month.

The Markit/CIPS UK Manufacturing PMI showed a reading of 55.1 last month, slightly higher than 55.0 in February, and surpassing economist forecasts of 54.7.

But, taking the first quarter as a whole, activity in the manufacturing sector has fallen to its lowest for a year, with a slowdown in orders dragging the sector down.

Rob Dobson, director at IHS Markit, said: ‘The latest PMI survey provided further evidence that UK manufacturing has entered a softer growth phase so far this year.

‘Although the pace of output expansion ticked higher in March, which is especially encouraging given the heavy snowfall during the month, this was offset by slower increases in new orders and employment.

‘Average rates of increase over the opening quarter as a whole are also down noticeably from the growth spurt seen at the end of 2017.’

Howard Archer, chief economic advisor for EY ITEM Club, said domestic conditions could prove particularly difficult for the sector in the coming months.

He said: ‘On the domestic demand front, still limited (albeit gradually improving) consumer purchasing power and business caution over investment amid significant uncertainties are a challenging combination for manufacturers.

‘This has been reinforced by increased prices for big-ticket consumer durable goods and capital goods.’

Written by BayRadio

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