Services sector to see 'steady but sluggish' growth

Expansion rate expected to remain unchanged in third quarter

Canary Wharf financial buildings in London
(Image credit: Dan Kitwood/Getty)

Britain's economy is set to record "steady but sluggish" growth over the coming months, reports Reuters.

The forecast comes from IHS Markit after the publication of the latest Purchasing Managers' Index survey for the services sector showed a pick-up from June's four-month low, but still lagged long-term trends.

July's survey gave a reading of 53.8, up from 53.4. Any reading above 50 suggests executives in the sector are reporting growth in orders and activity.

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The Guardian adds that new hiring in the sector is at its fastest rate since January 2016, although "optimism regarding the business outlook remains subdued" amid Brexit uncertainty.

IHS said: "The latest reading signalled a slower rate of business activity growth than the post-crisis trend.

"Survey respondents noted that heightened economic uncertainty and fragile confidence among clients were key factors acting as a brake on growth."

The services sector data follow similar updates for the smaller manufacturing and construction sectors in the past two days, which were respectively "upbeat" and "weak", says Reuters.

It adds: "Taken together, the data suggest the economy is growing at a 'steady but sluggish' quarterly rate of 0.3 per cent, the same as in the three months to June, said Chris Williamson, IHS Markit's chief business economist".

The figures are slightly out of kilter with forecasts published yesterday by the National Institute for Economic and Social Research, which predicted a faster acceleration in growth in the second half of the year and into next.

UK economy set to 'surge back to life', says think-tank

2 August

"Britain's economy will surge back to life in the next six months following its slow start this year," says The Guardian.

That's the view of the National Institute of Economic and Social Research, (NIESR) Britain's oldest economic think-tank, which has left its forecasts for annual economic growth this year and next unchanged at 1.7 and 1.9 per cent, says Sky News.

Given sluggish economic expansion of 0.2 and 0.3 per cent in the first two quarters, that suggests a significant pick-up in the second half of the year.

Under the surface, there are a few factors behind the optimistic assessment, chief among which is NIESR's belief that global growth will accelerate to 3.6 per cent this year, in line with a forecast from the International Monetary Fund saying the UK economy will grow 1.7 per cent in 2017.

Faster global growth and expansion in the eurozone will boost UK exports, says NIESR, helping to offset slowdown in consumer spending as a result of higher inflation, says the Daily Telegraph.

Amit Kara, head of UK macroeconomics research at Niesr, said: "If you look below the bonnet of our forecasts, consumer spending is no longer the engine of growth for the UK next year – the contribution shrinks to almost nothing."

Despite that, NIESR has revised down its forecast for peak inflation from 3.4 per cent to three per cent and as a result of faster growth and pay improvements, is calling the Bank of England to raise interest rates sooner than expected.

It had predicted the next increase in rates would come in the second quarter of 2019, but it now says this could come as soon as the first quarter of 2018.

UK economy edges up in second quarter

26 July

UK economic growth edged higher in the second quarter but still lagged behind Bank of England forecasts.

Gross domestic product (GDP) expanded at a rate of 0.3 per cent, up from 0.2 per cent in the first quarter, reported the Office for National Statistics (ONS).

Growth was more than twice that pace for much of last year and at its last inflation report in May, the Bank of England predicted it would hit 0.4 per cent.

Darren Morgan, head of national accounts at the ONS, said the economy "experienced a notable slowdown in the first half of this year", reports the Financial Times.

Britain's dominant services sector, which accounts for almost 80 per cent of total output, rose from 0.1 per cent in the first quarter to 0.5 per cent.

However, John Hawksworth, chief economist at PwC, warned that will have been boosted by higher retail spending thanks to the late timing of Easter and warmer weather in June bolstering clothing sales.

"The underlying trend is for consumer spending growth to moderate as real incomes are squeezed by higher inflation," he added.

Industrial production and construction output both shrank during the quarter, by 0.5 and 0.9 per cent respectively.

On an annual basis, the economy grew at 1.7 per cent in the second quarter and the Bank of England and Office for Budget Responsibility have predicted growth of two per cent and 1.9 per cent for the year as a whole.

Hawksworth predicts, however, that the current "modest" growth will continue and the year will come in at 1.5 per cent.

Despite this, traders responded positively to the fact the report did not bring a downside surprise and was in line with private sector estimates, helping the pound to hold above $1.30.

UK falls to bottom of global growth league

1 June

It's now official: the UK has registered the joint-slowest economic growth rate among the G7 group of advanced nations in the first quarter.

This was confirmed yesterday after Canada posted expansion of 0.9 per cent for the three months to the end of March, shooting Justin Trudeau's country to the top of the growth league.

Britain's economy, which has proved resilient since the Brexit vote last June, was confirmed last week to have recorded expansion of just 0.2 per cent in the period – the same as the G7 strugglers Italy, says The Guardian.

In between, Germany came second with growth of 0.6 per cent, followed by Japan (0.5 per cent), France (0.4 per cent) and the US (0.3 per cent).

Ahead of the start of Brexit negotiations, the UK economy is now seen to be expanding at less than half the 0.5 per cent rate recorded across the wider European Union in the first quarter.

It's quite a fall from grace for Britain. After a slow recovery from the financial crisis, it was lauded as the fastest growing advanced nation in the world for much of the period between 2014 and 2016.

Full Fact says the UK was top of the G7 table in 2014, second only to the US in 2015, and was posting the fastest quarterly rates throughout last year.

By February, however, the Office for National Statistics had downgraded UK growth in 2016 and Germany was seen to have taken top spot. Quarterly growth then slumped from 0.7 per cent in the first three months of this year.

Growth fell because of a slowdown in the services sector, the result of rising inflation thanks to the pound's slump since the Brexit vote last June.

In short, price rises have hit a three-month high of 2.7 per cent at a time when wage growth is stubbornly low at a little above two per cent. This is diminishing consumer spending power.

The UK is still expected to prove resilient to Brexit headwinds, however.

The Bank of England has upgraded its growth forecast for this year from 1.8 to 1.9 per cent, while the credit ratings agency Moody's has upped its prediction from a lowly one per cent to 1.5 per cent.

UK growth slowdown worse than feared

25 May

A hit to UK economic growth in the first quarter of this year, in large part blamed on a fall in spending following the Brexit vote, was worse than thought.

The second estimate of GDP expansion for the three months to the end of March from the Office for National Statistics put growth for the period at just 0.2 per cent.

That is down from a first estimate at the end of April of 0.3 per cent and is less than a third of the 0.7 per cent growth recorded in the final quarter of 2016. It is also the slowest quarterly growth rate since the first three months of last year.

Annual growth has also been revised down to two per cent from 2.1 per cent previously.

Earlier this month the Bank of England predicted that the second estimate of GDP today would upgrade first quarter growth to 0.4 per cent, says Reuters.

The reasons behind the slowdown are the same as those cited at the time of the first estimate: namely, that growth in the dominant services sector took a big hit.

In fact, from 0.8 per cent in the final three months of last year, expansion in services fell to 0.2 per cent, down from a first estimate of 0.3 per cent.

In large part this is being seen as a result of the pound slump since the Brexit vote, says the Financial Times, which has boosted import prices and sent inflation surging to 2.7 per cent, well above current levels of wage growth.

That means on average people have less disposable income and so are spending less than they might. As services make up 80 per cent of the economy this has profound implications for wider growth.

"Household spending rose 0.3 per cent on the quarter – the weakest in three years," says the FT.

There were reasons to be cheerful: business investment was up 0.8 per cent, marking the fastest growth rate since the end of 2015. That means companies are showing signs of confidence in the underlying economy.

Brexit price rises slam brakes on GDP growth

28 April

Brexit may be taking a toll on the UK economy, according to GDP figures published this morning.

Data from the Office for National Statistics (ONS) shows economic expansion in the first three months of the year came in at 0.3 per cent, down from 0.7 per cent in the final months of 2016.

It means that having outperformed expectations following the Brexit vote last June, the economy underperformed expectations that it would grow 0.4 per cent in the past three months.

It's also the slowest quarterly growth rate for a year, says The Guardian.

Critically, that was driven by the UK's powerful services sector, where growth slowed from 0.8 per cent to 0.3 per cent, says the Financial Times.

Services - everything from retail purchases to banking and finance - accounts for around 80 per cent of the UK economy, so a downturn in this segment is especially worrying.

The ONS singled out the Brexit hit to inflation for the retail slowdown, caused by the slump in the pound since the EU referendum and the corresponding increasing in import costs and consumer prices.

It reported there were "falls in several important consumer-focused industries, such as retail sales and accommodation; this was due in part to prices increasing more than spending".

James Smith, an analyst at ING, said: "After a remarkably strong run through 2016, the UK economy has started to slow as consumers cut back on spending."

"This household squeeze is likely to be compounded by the effect of Brexit uncertainty, which may increasingly deter firms from hiring and investing.

"Whilst trade should perform better thanks to the weaker pound, we don't expect this to be enough to prevent growth gradually slowing through this year."

UK economy accelerates but still loses fastest in G7 crown

February 22

The economy surged in the final months of last year, with a revised official estimate upgrading the GDP growth figure for the quarter to the end of December.

Previously, the Office for National Statistics had estimated growth of 0.6 per cent for the three months, but today said the economy had expanded at a rate of 0.7 per cent.

The news will be welcomed by the government, as will the observation that the acceleration was driven by the manufacturing sector, which has acted as a drag on the economy for a long time.

The Financial Times says producers increased output by 1.2 per cent during the quarter, adding 0.1 per cent to overall GDP growth.

Services, which accounts for 80 per cent of the economy, grew by around 0.8 per cent and added 0.6 per cent to the overall growth rate, says the Belfast Telegraph.

Despite these positives, the UK economy lost its crown as the fastest growing country in the G7 group of the largest advanced nations. This was the result of statisticians downgrading growth during earlier periods of last year.

Growth was revised lower for the first quarter between January and March. This dragged down the annual rate from two per cent to 1.8 per cent.

Last year, the economy grew by 2.2 per cent, but Chancellor Philip Hammond is expected to announce next month that GDP is forecast to fall modestly again this year to 1.6 or 1.7 per cent.

A key indicator of how the economy is performing, especially since the EU referendum vote last June, is business investment, which economists say is falling as companies await the outcome of Brexit talks.

Company spending fell one per cent in the last quarter of 2016 and dropped 1.5 per cent overall compared to 2015, says the Belfast Telegraph, the first fall since 2009.

But the FT says that once the effects of the slowdown in the pound are discounted, "both investment and trade have been stable in the six months since the EU referendum".

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