UK Services Sector PMI Data Disappoints, Confirms Slowing Economy

Services sector impact on the Pound

The UK's dominant services sector - which accounts for in excess of 80% of UK economic activity - was seen slowing sharply over the course of May.

PMI data from IHS Markit and the CIPS showed a renewed slowdown in business activity growth across the UK service economy, following the four-month peak achieved in April.

The PMI read at 53.8, well below the 55.0 forecast by economists and the 55.8 recorded in April.

A news release accompanying the data attributes the slowing activity to a softer pace of new
order growth linked to squeezed household budgets and, in some cases, delayed decision making among clients ahead of the General Election.

However there was some good news in that the impact of inflation is starting to fade with  the latest survey pointing to the least marked rise in input prices since September 2016.

And while service providers indicated a further solid upturn in new business volumes, but the rate of expansion was the least marked for three months.

“The powerhouse driving UK GDP lost some of its force this month, with the weakest performance since February, revealing a fragility out of sync with the other sectors which were fired up and running," says Duncan Brock at the CIPS.

A strong outcome here could give the British Pound a bump higher and confirm support levels for the currency remain intact.

Construction and Manufacturing PMI data have both surprised to the upside and confirm that the UK economy is seeing activity accelerate in quarter-two 2017.

Recall the quarter-one only saw growth rise by 0.2%.

Interestingly, the Pound failed to react at all to the data confirming eyes are firmly fixed on Thursday's General Election.

Analyst Robin Wilkin at Lloyds says GBP/USD is now caught between the UK election risks at the end of this week, and the broader USD weakness and a "very disappointing number is needed to move this rate."

Expect the exchange rate to remain trapped in a range between 1.2775/50 support and 1.2940 resistance.

However, Scott Bowman, UK Economist at Capital Economics, sees the data as confirming a trend of improving UK economic performance.

"May’s Markit/CIPS report on services still implies that GDP growth has accelerated after the sharp slowdown experienced in Q1. And the forward-looking balances suggest that this pace can be maintained in the coming months," says Bowman.

World Bank Upgrade UK Economic Outlook

Confirming expectations for a more robust economic performance for the UK going forward are the World Bank who have upgraded forecasts for UK growth over the next three years against a stronger global backdrop that will boost the British economy despite its weak start to the year.

Economists at the World Bank expect the UK economy to grow by 1.7% this year. This is only slightly below last year’s expansion of 1.8%, and up from a forecast of 1.2% in January.

The revisions were driven by expectations of stronger growth in advanced and emerging economies, with a recovery in industrial activity and a rise in global trade expected to lift output around the world.

World Bank economist Franziska Ohnsorge says the near-term upgrade was driven by "unexpectedly resilient" activity around the turn of the year.

She adds the UK's highly open economy meant it would be sensitive to developments in the global economy over the next few years, while a projected upturn in the eurozone was also expected to lift UK growth, "despite uncertainties related to Brexit discussions".