Services slump leading to loss of momentum for UK economy

UK services sector activity slumped to an 11-month low last month, with the worst hit areas being consumer-facing industries such as hotels, restaurants, cinemas and gyms.

The IHS Markit UK services purchasing managers' index fell to 53.2 in August from 53.8 the month before, a little short of the 53.5 that the market expected and the lowest since September 2016.

Services companies said subdued client demand and heightened uncertainty about the domestic economic outlook was weighing on growth.

New order volumes increased at the second slowest rate since last September, with a number of service providers commenting that fragile business confidence had led to delayed spending decisions among clients.

Weaker growth was most evident in consumer-facing sectors such as hotels, restaurants and other personal services, Markit said.

Despite the slowdown, there was a two year high in the number of firms reporting increased work backlogs, with hiring reaching a 19 month-high and driving wages slightly higher.

This contributed to cost pressures growing at the sharpest rate since February, also driven by higher fuel bills and prices for imported items.

Chris Williamson, chief business economist at IHS Markit, said: “A summer slowdown was evident in the economy as the August PMI surveys showed slower rates of expansion in services and construction offsetting an improved performance in the manufacturing sector.

"The resulting overall expansion was the weakest for six months. Although the latest two months’ data put the economy on course for another 0.3% expansion in the third quarter, momentum is being gradually lost.

"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."

He said overall level of optimism also remained subdued, mainly linked to Brexit uncertainty, close to levels that have previously been indicative of the economy stalling or even contracting.

“While a rise in price pressures will add to worries that inflation could pick up to perhaps 3% again in coming months, the overall level of the PMI remains more consistent with policymakers erring towards stimulus rather than hiking interest rates, suggesting the doves will continue to outnumber the hawks.”

The decline in the services index to its lowest level in 11 months brings more evidence, said economist Sam Tombs at Panthon Macroeconomics, "that the hit to real incomes from sterling’s depreciation and heightened uncertainty about the economic outlook—both attributable to Brexit—are holding the economy back".

Tombs said that, on past form, August's reading for the business activity index is consistent with quarter-on-quarter growth in output in the private non-distribution services sector, which represents around 55% of GDP, of about 0.4% for the third quarter, slightly less than the 0.5% expansion recorded in the second.

With the decline in the new orders index to 54.2 in August from 54.7 in July signalling continued weakness in demand, he doubted that stronger rates of growth in either employment or wages will be sustained.

Paul Hollingsworth at Capital Economics pointed to the stronger employment index and that Markit's future activity index picked up from 64.0 to 65.7, "suggesting that this month’s weakness might prove short lived"

Nonetheless, he agreed that the average level of the all-sector PMI in the third quarter so far was consistent with quarterly GDP growth of about 0.4%.

"Note too that the survey overstated the economy’s strength in Q2. Nonetheless, we think that the manufacturing sector should put in a much stronger performance in Q3, after a punchy decline in Q2. This should help to offset any slowdown in the consumer-facing services sectors in particular.

"As a result, we continue to think that growth will come in a bit stronger in the second half of the year."