UK services sector hardly grows in July and optimism drops to lowest since March, survey shows

Latest services PMI reading is much weaker than seen on average since end of last recession

‘We have to find a definition in law of what class is, otherwise no law can be passed’ (AFP)

Growth in Britain’s dominant services sector remained tepid in July and confidence about the year ahead dropped to the weakest since March, when the country was on the brink of leaving the EU without a deal.

A closely watched survey-based measure of the sector’s health, known as the PMI, inched up to 51.4, slightly above the 50 mark that indicates flat activity compared with the previous month. Although the reading is the highest since October, it is much lower than seen on average over the past decade.

As in June, numerous firms reported that a lack of clarity over domestic politics was forcing clients to hold off making major decisions and commissioning new work.

“While services activity grew in July, this marginal improvement on last month is a smokescreen. Fundamental weaknesses remain in a sector pinned down by Brexit uncertainty and increasingly stagnant global economic growth,” said Duncan Brock at the Chartered Institute of Procurement & Supply, which produces the survey alongside IHS Markit.

Chris Williamson, chief business economist at IHS​ Markit, said: “The overall picture is one of an economy that is only just managing to skirt recession, with July’s performance among the worst since the height of the global financial crisis in 2009.”

The latest PMI indicates that the economy stagnated at the start of the third quarter after earlier surveys pointed to a 0.1 per cent decline in the second quarter, he added.

The weaker pound proved to be a double-edged sword for the services sector. On the one hand, a number of firms said sales to clients abroad had improved. But average costs had spiked - driven by the pound’s depreciation and higher wages and fuel prices – squeezing profit margins.

One glimmer of hope in the July poll was the strongest rise in new orders since September after a fall in June. It suggests the overall tick-up in activity “might not just be a flash in the pan”, said Andrew Wishart, economist at Capital Economics.

The release follows PMI surveys of manufacturing and construction, which showed falls in activity in both sectors last month.

But Mr Wishart noted that the surveys had tended to be overly pessimistic during the first half of the year compared with official data released subsequently. Samuel Tombs, economist at Pantheon Macroeconomics, made a similar observation, pointing out that the polls do not cover retail sales and government spending.

Retail sales have been strong recently as has overall consumer spending so far this year, but another release on Monday suggested it is weakening. Sales of new cars fell 4.1 per cent in July compared with a year ago, according to the Society of Motor Manufacturers and Traders, with sales to individuals down 2 per cent.