UK services activity picks up, economy on track for flat quarter

The UK economy is on track for its worst quarter of growth since the end of 2012 even though services activity improved slightly last month.

The IHS Markit/CIPS UK purchasing managers' index rose to 51.3 in Feburary from the two-and-a-half year low of 50.1 in the prior month. The market had expected a decline to 49.8.

This leaves the index on track for its weakest quarter since the end of 2012 and, following soft manufacturing and construction PMI surveys, with economists suggesting that quarter-on-quarter UK gross domestic product growth will slow to 0.0-0.1% in the first quarter of 2019, from 0.2% at the end of last year.

“The latest PMI surveys indicate that the UK economy

remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU," said Chris Williamson, chief business economist at IHS Markit.

He said the data pointed to the economy being on course to grow by just 0.1% in the first quarter.

“Worse may be to come when pre-Brexit preparatory activities move into reverse. Many Brexit-related headwinds and uncertainties also look set to linger in coming months even in the case of PM May’s deal going through. Global economic growth meanwhile remains sluggish, adding an increasingly gloomy backdrop to the UK’s current problems."

While Brexit uncertainty continues, growth is unlikely to accelerate, agreed economist Thomas Pugh at Capital Economics, predicting stagnant growth in the first quarter.

But with government representatives in Brussels looking to secure adjustments to Prime Minister Theresa May's Brexit deal, the securing of a Brexit deal, "growth will surely rise later this year".

In the here and now, uncertainty reigns.

Services companies said these Brexit-related doubts were by far the biggest handbrake on business activity growth in the past month, with many reporting to Markit that political uncertainty had encouraged delays to corporate spending decisions and a general rise in risk aversion among clients.

Backlogs of work and levels of new work both continued to fall off, although the rate of contraction eased from January. European clients in particular were holding back from committing to new projects.

Services employment weakened to an eight year low, dragging the composite employment balance with the manufacturing sector from 49.3 to 48.0, the fifth consecutive monthly fall and lowest level since 2011. This points to employment growth in the whole economy slowing from about 1% to about 0.5%.