Service industry activity slumps to post-eu vote nadir

● Weather-related hit to the biggest area of the economy could knock Q1 growth

Economic uncertainties and the Beast from the East took their toll on Britain’s powerhouse services sector last month as activity fell to it lowest level since 2016’s Brexit vote.

Businesses in the sector, which accounts for almost three-quarters of economic output, were disrupted by the severe cold snap and snow which contributed to subdued consumer spending.

The closely watched Markit/ Cipsservicespurchasingmanagers’ index (PMI) – released yesterday – showed a reading of 51.7 for March, down from 54.5 in February and missing economists’ expectations of 54.

While the result remains north of the 50 mark that separates growth from contraction, it is the weakest service sector performance since July 2016.

“Heightened economic uncertainty” also affected the sector, acting as a “brake on growth”, the report noted.

It comes after separate PMI data earlier this week revealed a contraction in the construction sector and only a marginal month-on-month improvement in manufacturing.

Service sector firms suffered the slowest rise in new business volumes for 20 months. On top of the poor weather, respondents cited subdued consumer demand and reported that Brexit-related uncertainty had led to clients delaying their decision making and taking fewer risks.

Employment in the sector increased at a “moderate pace” which was the slowest seen so far this year, with some businesses pointing to tight labour market conditions and difficulty filling vacancies.

Analysts at Barclays noted: “The ‘Beast from the East’ storms and Brexit concerns teamed up in March, sending the service PMI to its lowest level since the EU referendum.

“While part of the fall can be attributed to unusually bad weather, companies also mentioned wider economic woes weighing on demand. This, together with falling business expectations, poses downside risks to activity in the coming quarters, even though we do not think that this would deter the Bank from hiking [interest rates] in May.”

Howard Archer, chief economic adviser to the EY Item Club, said: “With construction activity also being hit markedly, the March purchasing managers’ surveys overall fuel belief that the severe weather may well have caused GDP growth to dip to 0.3 per cent quarter-on-quarter in the first quarter of 2018.

“Admittedly, manufacturing activity appears to have been little affected but it is also notable that the March CBI distributive trades survey pointed to an appreciable hit to retail sales.

“We suspect that much of the activity lost to the bad weather in March will eventually be made up.”

Service businesses also suffered another sharp rise in costs, with higher staff salaries, utility bills and raw materials like food and drink resulting in the strongest inflation rate for three months.