UK Service Sector Drops on Brexit Fears

Growth in the United Kingdom service sector slowed in April for the third time in the past five months, with the business activity and business optimism readings dropping to low points not seen in over three years, as noted in the Markit/CIPS UK Services PMI.

The seasonally adjusted Markit/CIPS UK Services Business Activity Index dropped in April to 52.3 from 53.7 in March—this index has averaged 55.2 since its inception in July 1996, Markit Economics said. “The slowdown in the service sector follows similar weakness in manufacturing and construction to make a triple-whammy of disappointing news on the health of the economy at the start of the second quarter,” said Chris Williamson, chief economist at Markit.

Some firms surveyed for the index reading cited fears surrounding Brexit (Britain leaving the European Union) have added to the economic uncertainty, in part, by way of delayed orders from customers, Markit Economics analysts said. Also, introduction in the U.K. of the national living wage was cited as an important factor that drove up input costs in April; and the inflation rate hit a 27-month high because of surging fuel prices and the effects of a weaker pound.

“The EU referendum and introduction of the national living wage are unique moments in time for the UK services sector, and indeed the wider economy. The question lingers as to how deep an impact they will both have on the sector in the long term,” said David Noble, group chief executive officer at Chartered Institute of Procurement & Supply.

Most worrying within the U.K’s service sector is the financial community, as analysts anticipated a wholesale exodus from London, said NACM Economist Chris Kuehl, Ph.D. “There is also concern about tourism--It will be harder to enter the U.K. and there will be some hard feelings for a while as well," Kuehl said. "This has affected all the usual sectors such as entertainment and hospitality as well as retail.”

Still, not all news was dismal in the latest reading, as new business volumes picked up slightly in April, and the index carried on its overall march of uninterrupted growth over the past 40 months. That marks second-longest streak registered over the survey history, Markit analysts noted.

- Nicholas Stern, NACM editorial associate

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