UK growth threatened as services output hits 16-month low

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Activity in Britain’s powerhouse services sector slipped to a 16-month low in January, resulting in a “triple whammy” of weak data that stands to knock UK growth.

The closely-watched IHS Markit/CIPS UK Services purchasing managers’ index (PMI) showed a reading of 53.0 in January, down from 54.2 in December and lower than economist expectations of a figure of 54.1.

A reading above 50 indicates growth.

It resulted in services sector output rising at its slowest pace since September 2016, and adds to disappointment over PMI surveys covering manufacturing and construction sector performance in January.

“The pace of UK economic growth slowed sharply at the start of the year as January saw a triple whammy of weaker PMI surveys,” said Chris Williamson, chief business economist at IHS Markit, which compiles the survey.

“The softer service sector growth follows news of the manufacturing upturn losing momentum at the start of the year and a near-stagnant construction sector,” he added.

“All together, the PMI surveys point to the slowest pace of expansion since August 2016.”

Mr Williamson added that the January numbers were signalling a UK growth rate of “just under 0.3%” for the first quarter of 2018, which would mark a slowdown from 0.5% in the final month of 2017.

He added that the hit to services sector expansion reflected “waning” growth in demand for businesses and consumer-facing services like hotels and restaurants, while transport and communications also suffered a drop in market appetite for the second month running.

Many services firms have been knocked hard by Brexit-fuelled import costs, as well as surging business rates, fuel prices and salaries after the launch of the national living wage.

Efforts to offset this by rising prices comes at a tricky time for the British consumer, with households in the grip of a challenging income squeeze on the back of higher inflation and weaker wage growth.

The survey showed companies raised their prices in January, given “strong upward pressure on cost burdens,” particularly around insurance, fuel, transport, and food.

But businesses polled said a sustained rise in sales, acquisitions and new offerings helped drive output expansion last month – ultimately helping to keep the PMI reading above 50.

Of the new work that businesses were able to attract in January, growth was chalked up to “successful marketing campaigns,” greater market shares and new services offerings.

Companies also continued to hire new staff – with the pace of job creation at a four month high.

Employment in the services has now increased continuously for a year and a half.

Despite the slowdown, business confidence is at its strongest since last March, with firms still optimistic that business activity will be higher over the course of 2018.

James Smith, a developed markets economist at ING, said the reading dampens prospects of an imminent interest rate hike.

“Today’s data takes some pressure off the Bank of England to hike rates later this year. That said, policymakers will take heart from the better recent news on wage growth, which is showing signs of life as skill shortages become more prevalent. This means a 2018 rate hike now largely hinges on Brexit.

“We expect the Bank to keep its cards fairly close to its chest on Thursday, and we think at this stage, the odds of a May rate hike are roughly 50:50.”

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