UK economy losing momentum after growth in services sector slows to five-month low

Growth in Britain's services sector hit a five-month low in February, while input costs inflation rose to the highest level in more than eight years, a survey released on Friday (3 March) by IHS Markit Economics showed.

Markit's Purchasing Managers Index (PMI) for the services sector fell from 54.5 in January to 53.7 last month, falling short of expectations for a 54 reading and registering a second consecutive month of decline.

Any number above 50 indicates growth and February's figure was largely in line with the 53.2 reading recorded in the corresponding period in 2016.

"A further slowdown in UK business activity growth in February adds to evidence that the economy has lost momentum after the impressive expansion seen at the end of last year," said Chris Williamson, chief business economist at IHS Markit.

"Weaker consumer spending was a key cause of slower service sector growth, suggesting that household budgets are starting to crack under the strain of higher prices and weak wage growth."

The survey also found inflationary pressures "remained intense", with prices rising at their fastest rate in eight-and-a-half years.

The pound has slumped by some 16% against the dollar since Britain voted to leave the European Union in June, making imports more expensive.

"The ongoing steep upturn in costs suggests that consumer price inflation has significantly further to rise, adding to our belief that inflation will breach 3% over the course of the next year," Williamson added.

The report added the slowdown in the sector – which accounts for more than 75% of the UK economy – mainly reflected a more subdued pace of new business growth, which some services sector firms linked to more cautious spending among consumers.

However, business confidence remained strong, with service providers indicating that optimism remained in line with the post-referendum high recorded at the start of 2017.

"We remain more optimistic than most about the ability of the UK economy to weather these headwinds, and forecast GDP growth of 1.8% in 2017 and 2.5% in 2018," said Paul Hollingsworth, UK economist at Capital Economics.

Ben Brettell, senior economist at Hargreaves Lansdown, added: "2017 looks set to be a relatively challenging year for the economy, with higher inflation and weaker pay growth likely to squeeze household budgets. This means consumer spending could slow in real terms. "