U.K. service sector’s activity growth loses momentum in August, PMI index falls to 50.6

Service providers in the U.K. showed that business activity growth lost momentum in August and stayed weak in comparison to the trends seen over much of the past decade. The seasonally adjusted IHS Markit/CIPS U.K. Services PMI dropped to 50.6 from July’s 51.4, hinting at just a marginal growth of service sector output. This is the lowest reading since June and well below the long-run average of 54.9.

Weaker growth of service sector output greatly reflected a slower rise in new business intakes in August. Reports from survey respondents cited a sustained headwind from Brexit-related uncertainty and subdued corporate spending. Furthermore, new export work stalled, after a modest growth in July. A number of companies noted a boost to overseas sales from the soft sterling exchange rate, but there were also reports that some European clients had delayed committing to new projects in response to increased political uncertainty.

Backlogs of work reduced for the 11th successive month, which shows the longest period of decline since 2011/12. Service providers indicated that a combination of rising employment numbers and weaker new business growth had helped to ease pressures on business capacity. However, the latest rise in staffing figures was the slowest since the current period of expansion started in May.

August data indicated to a fall in business optimism for the third straight month. The latest survey indicated that the degree of sentiment about the growth outlook throughout the U.K. service sector is now the lowest for just over three years. Survey respondents widely commented on concerns that domestic political and economic uncertainty would have a negative effect on business investment and client demand.

In the meantime, the latest survey underlined intense pressure on operating margins at service sector firms. Input price inflation accelerated to its strongest since January, driven by reports of higher staff wages, rising fuel costs and greater utility bills. Nevertheless, intense competition for new work meant that prices charged by service providers increased at the slowest rate for just over three years.