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UK service sector growth slumps to eight-month low in June

Business sentiment in the service sector fell markedly to hit a six-month low, highlighting growing concerns about the UK macroeconomic outlook. Worries over Europe, the uncertainty over the direction of the UK economy and an anticipated post-Olympics lull also had a bearing on UK service providers’ future expectations, a survey released today reveals.

On a positive note, the Markit/CIPS UK Services (purchasing manager’s index) PMI survey demonstrated that the UK service sector continued to grow during June, albeit at a slower rate as the additional holidays around the Jubilee and reports of a fragile underlying demand environment weighed on activity and new business wins.

After accounting for usual seasonal factors, the headline Business Activity Index recorded 51.3. That was down from 53.3 in May and the lowest reading since last October. Growth has now been sustained for 18 months, but has recently seen a deceleration with the average index level for Q2 well down on that recorded for the opening quarter of the year.

Weaker activity growth in June stemmed in the main from a similar slowdown for new business. Latest data showed that sales rose again in June, but at the weakest rate in the current 18-month period of expansion.

Temporary factors played some part, with anecdotal evidence suggesting that the net effect of the Jubilee holidays was to reduce market activity. This was offset to some degree by reports of an increase in work ahead of the Olympics, but there was nonetheless a suggestion that business confidence was generally lower in June. The European sovereign debt crisis was reportedly a factor weighing on sentiment, creating an air of uncertainty that led to business plans being put on hold.

Efforts to grow sales volumes were supported in June by further discounting. UK service providers signalled a back-to-back fall in output charges as competitive pressures, client requests for tariff cuts and a lack of demand all depressed pricing power.

Chris Williamson, Chief Economist at survey compilers Markit, commented on the figures:

“The services economy saw one of its worst months since the recovery began three years ago, with the June survey showing signs of growth stalling. The data suggest that the sector grew by only around 0.2% in the second quarter, though the quarterly rate of growth will have slowed close to stagnation in June, boding ill for momentum going into the third quarter. A steep drop in service providers’ expectations about the year ahead also casts a gloomy shadow on prospects for the sector in the short-term.

“Looked at alongside the other PMI surveys, which showed an ongoing downturn in manufacturing and a sharp deterioration in the construction sector in June, the services PMI probably cements the case for further stimulus from the Bank of England, with the three surveys now collectively down firmly into territory that has triggered action from the Monetary Policy Committee in the past.”

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said:

“The Jubilee weekend clearly led to a temporary slowdown in activity across the services sector as whole. However, this one-off event does not disguise the fundamental uncertainties affecting the sector and the wider economy.

“The Eurozone continues to be the biggest drag on business confidence, along with a scarcity of big contracts, and the prospect of a post-Olympics slump in business. Meanwhile, margins continue to be under intense pressure, caught between increasingly competitive pricing and increasing costs. Businesses will need to innovate to counteract these challenges, particularly if they are to remain profitable in these difficult times.”

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