- U.K. Services Accelerate Amid Signs Consumer Clouds Gathering
The U.K.’s services sector grew faster than expected in March and surging costs prompted companies to raise their prices at the quickest pace in 8 1/2 years.
The momentum in IHS Markit’s monthly Purchasing Managers’ Index was accompanied by stronger growth in new business. Even so, the survey reflected gathering storm clouds for the U.K. economy as hiring slowed and the pickup in prices added to pressure on consumers already facing the fastest inflation since 2013.
The headline activity gauge rose to 55 from 53.3 in February, far better than the 53.4 predicted by economists. That’s still not enough to counter cooling manufacturing and construction growth though. Taking into account all three sectors, Markit predicts economic growth of 0.4 percent in the first quarter, which would be the weakest in a year.
“It could be a fairly tough year for consumers, who will have to contend with falling disposable incomes,” said James Smith, an economist at ING in London. “With that in mind, and given the heightened Brexit uncertainty now that Article 50 has been triggered, we suspect that the PMIs will trend lower.”
The pound rose 0.3 percent to $1.2473 after the report and was at $1.2473 as of 10:24 a.m. London time, though it didn’t erase Tuesday’s slide.
While some services companies cited uncertainty relating to Britain’s exit from the European Union as holding back investment, Markit said strong domestic and global economic conditions were supporting sales and companies were optimistic about the year ahead.
Still, it warned of “intense cost pressures” because of the weaker pound and reported the fastest rise in selling prices since 2008. That could prove to be a curb on demand and growth. Already consumer-focused firms such as hotels, restaurants, gyms and hairdressers have proved this year’s growth laggards.
“This sector makes up the majority of the U.K. economy and the prognosis is poor,” said Jeremy Cook, chief economist at the international payments company World First. Firms raising prices “means a turning of the screw for the man in the street.”
Some firms said that squeezed margins and rising wage bills meant they weren’t replacing staff who quit, with the rate of job creation the weakest since August.
Williamson said the latest numbers back the argument that the Bank of England should keep policy on hold as it balances accelerating inflation against maintaining demand after the U.K. started formal Brexit talks last week.