U.K. Services Growth Cools as Costs Dominate Firms’ Concerns

Updated on
  • PMI index falls to 54.5 in January from 56.2 in December
  • IHS Markit says services measure now at three-month low

Britain’s services sector, the driving force of the economy in recent years, cooled in January and companies saw costs surge at the fastest pace in six years.

The weaker reading in IHS Markit’s monthly index was accompanied by softer growth in new business and slower hiring. It said its headline Purchasing Managers’ Index fell to 54.5 from 56.2 in December, which was a three-month low but still above the key 50 level that divides expansion from contraction. The pound fell after the data.

 “We suspect that consumer services activity will be increasingly pressurized,” said Howard Archer, an economist at IHS Markit in London. The data “fuels our suspicion that the U.K. economy will find life increasingly difficult during 2017 and that growth will gradually lose buoyancy like a slow puncture.”

The report comes a day after the Bank of England raised its growth forecast for 2017, even as Governor Mark Carney warned that the country was only starting its Brexit journey and there were risks to the outlook. Against that backdrop, while some policy makers have begun to worry about accelerating inflation, Carney indicated the BOE won’t rush to tighten policy.

Faster consumer-price growth is being fueled in part by the weaker pound and higher energy costs. Echoing a separate report on manufacturing this week, Markit said services companies cited both those factors -- as well as salaries and freight charges -- for the increasing cost pressures they face.

“The main area of concern is the extent to which companies’ costs are rising,” said Chris Williamson, chief business economist at the London-based company.

He also said that an improvement in optimism among companies suggests the January slowdown could prove temporary.

Sterling fell against the dollar after the report and was at $1.2480 as of 11:06 a.m. London time, down 0.4 percent on the day. It’s dropped 16 percent since the U.K.’s June vote to leave the European Union.

Based on Markit’s combined surveys -- covering manufacturing, services and construction -- U.K. economic growth is running at a quarterly pace of about 0.5 percent, it said. That compares with 0.6 percent expansion in the fourth quarter of 2016.

— With assistance by Scott Hamilton, Jill Ward, and Lucy Meakin

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