The UK services sector saw business activity ease in March, the first decline in more than two-and-a-half years, as Brexit turmoil curtailed spending and weighed heavily on the economy.
The IHS Market/CIPS UK Services PMI Business Activity Index was 48.9 in March, down from 51.3 February and the first time it has been below the 50.0 no-change level since July 2016.
Aside from that dip immediately after the referendum on the UK's membership of the European Union, the March figure is the joint weakest seen over the past decade, equalling a previous low in December 2012.
Survey respondents said there was not enough new work to replace completed projects, as corporate clients in particular delayed spending decisions because of the political uncertainty. Taken over the first quarter as a whole, the three-month fall in new orders was the steepest since the second quarter of 2009.
The UK All Sector Output Index, the weighted average of the manufacturing, construction and services indices, was 50.0 in March, down from 51.4. A robust upturn in manufacturing – caused in large part by Brexit stockpiling – was offset by weaker output at services and construction firms.
Chris Williamson, chief business economist at IHS Market, said the UK was now at risk of sliding into a “deepening downturn”.
“The underlying picture of demand is even worse than the headline numbers suggest. Service sector order books have contracted the steepest rate since the height of the global financial crisis in 2009 so far this year, with companies reporting that Brexit uncertainty has dampened demand and led to cancelled or deferred spending, exacerbating a headwind from slower economic growth.
“A stalling of the economy in the first quarter will therefore likely turn into a downturn in the second quarter unless demand revives suddenly which, given the recent escalation of Brexit uncertainty, seems highly improbable.
“Such a scenario leaves the current consensus forecast for the UK economy to grow at 1.3% in 2019 looking far too optimistic; IHS currently expects to see just 0.8% growth in 2019 and even this modest performance is perhaps somewhat hopeful given the lack of any Brexit developments.”
David Cheetham, chief market analyst at xtb, said the services PMI was a “notable miss” on consensus expectations “and comes just a day after the construction sector equivalent showed a second consecutive sub-50 print, marking contraction territory. These surveys are seen as key leading indicators and taken together, they suggest that the UK economy is slowing with Brexit uncertainty clearly taking its toll.”
Most analysts had forecast the March services PMI to come in around 50.9.
However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, took a less pessimistic view. He said: “Encouragingly, optimism about the outlook among services firms rose to its highest level since October and the employment balance edged back above 50, though both remain well below their 2018 averages. On past form, the weighted average of the three PMIs in the first quarter points to quarter-on-quarter GDP growth slowing to about zero, from 0.2% in the first quarter.
“But note that the PMIs have tended to be too downbeat in the past when economic uncertainty has been high. Note too that the PMIs exclude the retail and government sectors.
“We continue to expect GDP to rise the first quarter at a similar pace to the fourth quarter.”