Services sector stagnates as uncertainty puts brakes on orders

THE services sector stopped contracting in April but managed only meagre growth as the Brexit delay resulted in more uncertainty for companies.

The purchasing managers’ index (PMI) from IHS Markit and the Chartered Institute of Procurement and Supply rose to 50.4, up from 48.9 in March. The dividing line between growth and contraction is 50 in this private sector survey. However, demand was stagnant or shrinking: new orders were in negative territory for the fourth consecutive month, the longest spell since the financial crisis.

Sterling dipped to hover around the $1.30 mark after the data was released. Hiring has dried up as businesses said they do not need extra workers right now, while inflation is still biting in terms of higher costs. New export orders have fallen in every month since August. Added to the manufacturing and construction industries, the overall picture for the private sector is barely more rosy. The total PMI rose from 50 in March to 50.9 in April.

“All three major parts of the economy were struggling to grow in April,” said Chris Williamson, chief business economist at IHS Markit. “The disappointing start to the second quarter follows a first quarter in which the average PMI reading was the lowest since late 2012 and indicative of the economy flatlining. Both GDP and labour market numbers could therefore disappoint in coming months.”

There are signs of a turnaround, however. Business optimism about the future rose to its highest level since Sept 2018 and the Bank of England suspected the surveys may be overly gloomy. “The relationship between survey responses and GDP growth may be weaker at times of high uncertainty. This may be because surveys are sensitive to changes in sentiment,” said the Inflation Report, though it also noted official data can be prone to revisions.

Economists at the Bank believe GDP rose by 0.5pc in the first three months of the year, aided in part by stockpiling ahead of the initial original Brexit day of March 29, followed by a slowdown to 0.2pc in the second quarter. This gives businesses a challenge as they built up supplies in case of a “no deal” Brexit but now face a repeat on Oct 31, the revised date for Brexit.

James Smith, an economist at ING, said: “While we think a no-deal Brexit seems relatively unlikely, firms have to continue planning for the worst.”