Brexit latest: Services growth falls for first time since September according to latest PMI survey

Services have been almost entirely responsible for the maintenance of growth since last June’s Brexit referendum

Services growth, including restaurants, slowed in January (Daniel Lynch)

Growth in the UK’s services firms fell for the first time since last September in January in a sign that the UK’s dominant economic sector may be moderating.

The latest Markit/CIPS Purchasing Managers’ Index survey gave a reading of 54.5 last month.

That’s down from 56.2 previously and lower than the 55.8 that the City had expected.

Any reading above 50 signals growth.

The pound immediately shed around 0.34 per cent against the dollar in response to the softer data to trade at $1.2477.

“For now it is too early to know whether this is a simple normalisation in the survey or a more genuine loss of momentum in the service sector,” said Allan Monks, an economist at JP Morgan.

Services, which account for about 80 per cent of UK output, have driven the economy since 2013 and have been almost entirely responsible for the maintenance of GDP momentum since last June’s Brexit referendum.

The economy’s growth of 0.6 per cent in both the third and fourth quarters of 2016 has defied widespread predictions of a slowdown and possible recession in the wake of the UK’s vote to leave the European Union.

Growth moderation

The January Purchasing Manager surveys for the manufacturing and construction sectors were released earlier this week and together with the services result are consistent, on past associations, with GDP growth in the first quarter of 2016 of approximately 0.5 per cent.

The Bank of England upgraded its GDP growth forecast for 2017 on Thursday to 2 per cent, up from 1.4 per cent previously.

The Bank said that it expected households to moderate their consumption more gradually in the face of rising inflation, brought on by the plunge in the pound since last June’s vote, than previously thought and for the household savings ratio to fall to its lowest level since at least the early 1960s.

But the Bank’s 2017 forecast is now higher than those of most private sector economists.

“Can the UK economy keep pace as inflation erodes the spending power of the consumer?” said Dean Turner, UK economist at UBS Wealth Management. “We don’t share the Bank of England’s optimism that households will continue to whittle away their savings to support spending.”

Cost pressures in services firms remained elevated in January according to the latest survey, with inflation rising to the highest rate seen since March 2011.

“The degree to which costs are rising threatens to test the tolerance of some policymakers [at the Bank of England] in terms of their willingness to ‘look through’ what’s likely to be a marked upturn in inflation in 2017,” said Chris Williamson, chief business economist at IHS Markit.