Finance

Pound falls to six-week low on signs that the UK’s powerhouse service sector has run out of steam

The pound fell to a near-seven week low as Britain’s powerhouse service sector suffered a slowdown amid cautious consumer spending and a steep rise in costs linked to sterling’s collapse.

The closely watched PMI survey put together by Markit fell to 53.3 in February, down from 54.5 in January, and below economists’ forecasts of 54.1. A reading above 50 indicates growth.

It marked the slowest rate of expansion since September last year and caught currency markets by surprise.

Signs are that Britain’s powerhouse service sector suffered a slowdown in February amid cautious consumer spending and a steep rise in costs linked to sterling’s collapse

The pound fell to a near-seven week low against the US dollar to trade at $1.222, and dropped 0.6 per cent versus the euro to a near-one month low of €1.160.

Analysts blamed higher inflation for the slowdown in consumer confidence.

Howard Archer, at IHS, said: ‘The purchasing managers’ survey showing services activity slowing to a 5-month low in February with new orders muted fuels suspicion that the UK’s economy since last June’s Brexit vote is beginning to crumble and an expected slowdown is now materializing.

‘The survey is further evidence of consumers becoming more cautious in their spending as their purchasing power is increasingly squeezed by higher inflation. It was reported that weaker consumer spending was a key cause of slower service sector growth in February.’

The services industry – which accounts for nearly 80 per cent of UK economic growth – was stung in part by a rise in operating costs which rose at their steepest pace in eight-and-a-half years on the back of a weaker pound.

The PMI surveys are worth taking note of as they are a good tool for predicting GDP

Businesses subsequently raised their own prices to try to offset those operating costs.

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, explained: ‘Exchange rate depreciation, rising energy costs and higher wage bills all had a profound impact on prices charged inflation, which was the highest since September 2008.’

The pound has dropped more than 18 per cent against the dollar and 10 per cent against the euro since the Brexit vote, increasing the cost of imports and subsequently driving up business input costs.

Sterling’s collapse has already pushed inflation to a two-and-a-half-year high of 1.8 per cent, with economists predicting a further rise towards 3 per cent later this year.

The survey said firms observed more ‘cautious spending’ among consumers in February, but Brock said that did not stop businesses from bumping up prices tags in preparation for further cost pressures.

The pound fell to a near-seven week low against the US dollar to trade at $1.222

He said: ‘This will have policymakers wondering whether consumers can continue spending as Brexit negotiations approach, or whether they rein back further in response to squeezed household budgets.’

But businesses are still optimistic despite cost pressures, with confidence about activity levels ‘little-changed’ from January’s post-referendum peak.

Job creation in the service sector rose at a ‘moderate pace’, and was driven by long-term expansion plans, higher workloads and product development – though hiring was subdued compared to the four-year trend.

Firms said they were positive about the sustained improvement in economic conditions, and were hoping that the near-term impact of Brexit jitters on client demand would be limited.

But businesses are still worried that higher inflation and business costs might constrain growth this year.

Chris Williamson, chief business economist at IHS Markit, said: ‘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.

‘The PMI surveys are collectively signalling GDP growth of 0.4 per cent in the first quarter.’

That would mark a notable slowdown from 0.7 per cent in the final four months of 2016.

Comments are closed.