Growth in the UK’s dominant services sector has hit its lowest level in three years as businesses become increasingly concerned about the risk of Britain voting to leave the European Union in June.
The services sector lost momentum in February, with falls in the pace of growth in business activity, new work and employment.
The Markit/CIPS survey of purchasing managers fell to 52.7 last month, from 55.6 in January, the slowest rise in the services sector since March 2013 and below the long-term trend of 55.2. Economists had been expecting a reading of 55 - a reading below 50 would mean the sector is contracting.
Chris Williamson, the chief economist at Markit, said companies working in the services sector were showing signs of faltering demand and boardrooms had also become “unsettled by concerns regarding the increased risk of Brexit, financial market volatility and weak economic growth at home and abroad”.
The disappointing data follows similarly weak readings for construction and manufacturing, which both also came in below expectations, suggesting the threat of a global slowdown in growth and fears about ‘Brexit’ are having an effect on businesses’ ability to grow.
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The composite PMI — which combines the readings for manufacturing, construction and services — is nearly at a four-and-a-half-year low. The weak reading will be a blow to the chancellor just two weeks before his Budget and suggests growth in the UK economy will fall to 0.3 per cent for the first three months of the year. This would push GDP growth down from the 0.5 per cent seen in the last quarter of 2015, which was already considered below average.
“These are clear signs that the drag from the January/February financial market rout and growing global growth concerns are impacting real economic activity,” said Kallum Berenberg, senior UK economist at Berenberg.
He added that the global economy had delivered “a treadmill of threats” since autumn, including an economic slowdown in China, a crisis in emerging markets, the EU migrant issue, sharp volatility on global stocks markets and the date of the EU referendum being announced.
The weaker increase in services activity was largely down to a drop in the volume of new business coming through. New contracts received by UK service providers rose at the weakest pace in almost three years, with some firms commenting that rising levels of global economic uncertainty had resulted in delays in clients placing new orders.
Growth in employment levels slowed for the third time in four months, rising at the slowest pace in two-and-a-half years.
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Less than half of survey participants forecast growth at their units over the next 12 months, although only 8 per cent expect a decline in business and the outlook for longer-term activity improved slightly from January’s three-year low.
“Despite rising slightly from January’s three-year low, business confidence in the service sector remained at a level which has historically presaged an imminent slowing in the economy to near stagnation or worse in coming months,” said Mr Williamson.
The slowdown is likely to cause concern for policymakers at the Bank of England that the economic recovery in the UK could be faltering and is likely to push the possibility of raising interest rates even further into the future.
Mr Williamson said the focus will instead “increasingly shift to whether policymakers may soon need to dig deeper into their toolbox to introduce new measures to shore up the economy with additional stimulus, and what tools might be used.”
Last month, the Bank of England governor hinted that interest rates could be cut further by the Monetary Policy Committee from 0.5 per cent amid a global slowdown in growth.
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However, Samuel Tombs, chief UK economist at Pantheon, said that although the survey was “exceptionally weak”, low unemployment and a weaker pound is likely to life inflation back to its target, adding that the “economic recovery likely will have to grind to a complete halt for the MPC to cut rates this time.”