The British services sector grew at its slowest pace in 16 months in January amid weaker rises in new work and continued Brexit uncertainty, casting doubt on further Bank of England rate rises, a report from IHS Markit and the Chartered Institute of Procurement & Supply said.
The seasonally adjusted U.K. services business activity index fell to 53.0 in January from 54.2 in December 2017 as client losses and Brexit concerns clipped output growth to a 16-month low, the purchasing managers' index report showed. Inflows of new business rose slightly faster than in January, but were still slower than seen for most of 2017, with panelists pointing to Brexit-related uncertainty as a key growth dampener.
"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. All together, the PMI surveys point to the slowest pace of expansion since August 2016," said Chris Williamson, chief business economist at IHS Markit.
"The January slowdown pushes the all-sector PMI into dovish territory as far as Bank of England monetary policy is concerned, historically consistent with a loosening bias," he added. "With the survey also indicating weaker upward price pressures, the data therefore cast doubts on any imminent rise in interest rates."
Services growth in January decelerated due mainly to Brexit fears, but services firms should watch out for the impact of rising costs to their bottom line, said Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply. "There will be a tipping point where profit margins cannot take the strain any longer and prices to consumers will rise further, so this spending blip could become a more entrenched position."
Service providers accelerated workforce expansion to its fastest level in four months, extending the streak of hiring increases to 18 months. The hiring spree was driven by new branch openings, pipeline projects and positive output expectations.
The business outlook among service firms for the next 12 months was at its strongest since March 2017, buoyed by planned increases in CapEx, advertising initiatives and greater market shares.
The service sector was grappling with mild capacity pressures and an uptick in outstanding business, but a few firms also noted worsening productivity.
Companies raised selling prices to shield profit margins amid rising cost pressures, namely from higher insurance, fuel, transport and food. Still, the overall rise in costs was the smallest since September 2016.
