Britain’s dominant service industry suffered its sharpest slowdown for nearly three years in February, in a sign that market uncertainty is starting to hit the real economy.
City economists rushed to downgrade their forecasts for first-quarter growth in response to the much weaker than expected purchasing managers survey. Recent manufacturing and construction surveys have also been disappointing.
Sam Hill, senior UK economist at RBC Capital Markets, said the results did “not make happy reading” and that the “pervasive sense of a slowdown in growth, alongside the risk of Brexit uncertainty hampering activity” had led him to cut his growth forecast.
Allan Monks, economist at JPMorgan, said that with the production industries in the doldrums, the economy was reliant on domestic demand and the service sector to deliver growth, but the “very weak” services data were a big concern.
With less than two weeks until the Budget, Chancellor George Osborne last week took the unusual step of warning there could be more spending cuts ahead.
Revisions to official data before Christmas showed that nominal GDP — the value of the economy without adjusting for inflation — was lower than thought.
The latest Markit/CIPS survey of purchasing managers fell steeply to 52.7 in February from 55.6 in January — its weakest since March 2013 and well below trend. However, any reading above 50 indicates expansion in the sector.
Chris Williamson, chief economist at Markit, said businesses were worried by signs of slowing demand but “boardrooms have also become unsettled by concerns regarding the increased risk of Brexit, financial market volatility and weak economic growth at home and abroad”.
Elizabeth Martins, economist at HSBC, noted that recent official data also showed a sharp fall in business investment, suggesting the economy “may not be as resilient to Brexit risk as some had been hoping, particularly in a volatile global environment”.
The composite PMI — which combines the manufacturing, construction and services data — is now at a nearly four-and-a-half year low and signals overall UK growth of only 0.3 per cent in the first quarter of the year.
One of the main questions for policymakers, said Martin Beck, senior economic adviser at the EY Item Club, is whether the surveys indicate a genuine slowdown “or are merely reacting to the negative headlines since the start of the year”.
The Bank of England’s Monetary Policy Committee is currently unanimously voting for rates to remain on hold, but the weaker results would boost those who favour a rate cut.
In a note to clients, Alan Clarke, economist at Scotiabank, said the PMIs were now in what would be considered “rate cut territory”.
While the markets are not pricing in the first rate rise for three years, many economists believe it will happen early next year.
Samuel Tombs of Pantheon said the survey was “exceptionally weak” but that with low unemployment and the weaker pound likely to start to lift inflation “the economic recovery likely will have to grind to a complete halt for the MPC to cut rates this time”.
Less than 50 per cent of survey respondents said they expected their businesses to grow over the next 12 months, although only 8 per cent expected a contraction.
Jeremy Cook, chief economist at payments company World First, said there were “simply too many all-encompassing questions that need answering for businesses to feel that they have a solid foundation to grow”.
He added: “So, for now, expect the engine of UK economic performance to tread water, at best.”
SOURCE: Financial Times
