UK services sector undershoots expectations in January hinting at slowing wider economy

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The dominant services sector undershot expectations in January, confirming an impression of a slowing wider UK economy in early 2018.

The Purchasing Managers’ Index was 53 in the month, down from 54.2 previously and below City of London analysts’ expectations that it would strengthen to 54.3.

Any reading above 50 signals growth, but this was the weakest rate of expansion recorded since September 2016.

IHS Markit, which compiles the survey, reported that firms – spanning transport companies, to IT outfits, to hotels and restaurants – said growth was curtailed by a loss of clients and “lingering concerns” surrounding Brexit. 

The weak reading sent sterling down against the dollar to $1.4120 as traders reined in bullish bets on earlier rate rises from the Bank of England.

The PMI reading for services, which accounts for roughly 80 per cent of UK output, also follows two similarly lacklustre readings last week for construction and manufacturing in January.

Weakest since 2016

“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 of IHS Markit.

He added that the latest readings were consistent, on historical patterns, with GDP slowing to 0.3 per cent in the first quarter of 2018, down from the official estimate of 0.5 per cent growth in the final quarter of 2017.

“Brexit blame has emerged once again as the reason for the slowdown in growth of services activity … as consumers reined in spending and displayed anxieties about the future,” said Duncan Brock of the Chartered Institute of Procurement and Supply.

Respondents cited a “marked waning” of demand for consumer-facing services such as a hotels and restaurants.

The Bank of England will unveil its latest economic forecasts on Thursday.

The Bank’s Governor, Mark Carney, hinted last week that there will be an upgrade in the Bank’s growth projections for this year, possibly prompting an earlier next interest rate rise.

But the picture is clouded by Brexit, which surveys suggest is suppressing business investment as firms wait for more clarity on future trade arrangements before committing to capital spending projects.

“January’s [PMI] report should prompt investors to reassess their view that the chance of the [Bank’s] Monetary Policy Committee raising interest rates again as soon as May is as high as 50 per cent,” said Samuel Tombs of Pantheon.

“The latest PMIs strengthen the case for the MPC to take a lengthy pause before raising interest rates again.”

The Bank raised rates from 0.25 per cent to 0.5 per cent last November in response to what it described as building underlying inflationary pressures, the first hike in the UK cost of borrowing for a decade.