UK services sector hit by Brexit worries

Output in Britain’s dominant services sector increased marginally in February, but hiring declined at its fastest pace in seven years as Brexit concerns continue to weigh on the economy.

The closely watched IHS Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 51.3 last month, up from the two-and-a-half-year low of 50.1 recorded in January. A reading above 50 indicates growth.

The reading beat economists’ expectations of 49.8 but recent data suggests the economy is close to stagnation and on track for its weakest quarter since the final three months of 2012.

The data indicates that the economy will grow by just 0.1% in the first quarter of 2019.

New work fell for the second month in a row in February and employment numbers declined at the fastest rate since 2012 as financial services firms held back on hiring due to subdued demand and concerns about the outlook of the economy.

IHS Markit said uncertainty surrounding Britain’s departure from European Union was the most prominent factor cited by companies as affecting business activity, with firms delaying spending decisions as they become more risk-averse.

Parliament has been in a deadlock over Brexit since MPs rejected Prime Minister Theresa May’s Withdrawal Agreement with the risk of a no-deal Brexit increasing.

The services data follows disappointing construction numbers on Monday which revealed that Britain’s building sector contracted in February to its lowest level in almost a year.

Chris Williamson, chief business economist at IHS Markit, which compiles the survey, said: “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. The data suggest the economy is 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.

“Business optimism about the year ahead has consequently sunk to the lowest ever recorded by the survey with the exceptions of the height of the global financial crisis and July 2016.”

Howard Archer, chief economic adviser at Item Club, said that, with the economy continuing to struggle in the first quarter amid heightened Brexit uncertainty and slower global growth, the Bank of England is unlikely to hike interest rates before November as policymakers will want to see sustained evidence that the economy is improving.

“There is a genuine chance now that the Bank of England will sit tight on interest rates through 2019 – especially if Brexit is delayed and extends the uncertainty”.