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UK service sector narrowly returns to growth after Brexit delay

UK service sector narrowly returns to growth after Brexit delay

The UK services sector returned to growth by a small margin in April but remained “near-stagnant”, according to a closely watched industry survey.

The IHS Markit/CIPS purchasing managers’ index for services rose to 50.4 in April, up from 48.9 in the previous month and broadly in line with consensus expectations in a Reuters poll. A reading above 50 indicates a majority of companies reporting expanding business activity.

The data suggest there was a small improvement in the economy in April, when the Brexit date was delayed to October, averting the immediate threat of a no-deal exit from the EU.

“A near-stagnant service sector in April means that all three major parts of the economy were struggling to grow in April,” said Chris Williamson, chief business economist at IHS Markit, on Friday. “Although the service sector joined construction in reporting a return to growth, in both cases the expansions were only marginal.”

The data indicated a fall in new business activity for the fourth consecutive month, while employment numbers were broadly unchanged. The companies surveyed reported that higher wage costs and weaker sales had led to cautious staff hiring policies, according to the report.

New sales to overseas customers also softened in April, with companies reporting that Brexit uncertainty had hit demand from European clients, IHS Markit said.

The April services PMI “suggests that the services sector is in the slow lane in the immediate aftermath of the decision to delay Brexit”, said Howard Archer, chief economic adviser at the EY Item Club. “A further fall in new business and reduced backlogs of work hardly fuel optimism that the services sector is about to step up a gear”.

The services sector accounts for about 80 per cent of the UK economy. The April services PMI was weaker than the corresponding readings for construction and manufacturing. Manufacturing activity was boosted by unprecedented levels of stockpiling in March that waned in April.

The composite PMI, which comprises the three sectors, rose to 50.9 in April from 50 in the previous month, well below the 2017 and 2018 averages.

The composite reading “suggests that GDP in Q2 rose by just 0.0-0.1 per cent”, said Thomas Pugh, economist at Capital Economics. However, on Thursday the Bank of England warned that surveys could be less accurate predictors of economic growth at times of “high uncertainty”. It said in its inflation report that “this may be, in part, because surveys are sensitive to changes in sentiment”.

The Bank of England forecast growth of 0.5 per cent in the first quarter of 2019, an acceleration from the 0.2 per cent recorded in the last quarter of last year, partially because of stockpiling in the UK and EU. Yet, as the effect of stockpiling wanes, UK economic growth is expected to slow to 0.2 per cent in the second quarter.

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