U.K. services sector activity weakens sharply in March, PMI index falls to 48.7

The U.K. services PMI disappointed greatly in the month of March, falling in the contraction territory. The IHS Markit services PMI index fell to 48.7 from February’s 51.3 level. Expectations were generally centred on a fall, however, in the end, the outturn was noticeably softer than the consensus forecast of 50.9.

The outturn of today represents the second worst reading in the past decade, outdone only by the 47.4 seen in the aftermath of the EU Referendum result, noted Lloyds Bank in a research report. Around these levels, the services PMI continues to be below its long-term average of 54.9, and considerably down on the levels seen in the past year, implying that overall confidence in the service sector has weakened considerably. According to IHS Markit, in its accompanying commentary, survey respondents noted that “corporate clients had opted to delay spending decisions in response to intense political uncertainty”.

Unlike the manufacturing PMI, the services report is not a composite measure and only captures companies’ sentiment towards current activity. However, the more forward-looking components of the survey also underlined some disappointing trends. The indicator of new business orders recorded a third-straight monthly print below 50, in line with a deterioration in order books. While anecdotal evidence from the survey implies that this was in part related to “domestic political uncertainty had constrained demand”, it also reflects another marked fall in new work from abroad.

In the meantime, the measure of outstanding work remained below 50, implying a further fall in work-in-hand. Less new business and a fall in outstanding work does not augur well for the activity outlook in the months ahead. Against this weaker fall, companies kept a comparatively muted hiring approach last month.

Still, the fact that much of the deceleration in business activity continues to be attributed to ongoing political uncertainty implies that there is scope for confidence to rebound, especially if the U.K.’s future with the EU becomes clearer. For now, the sharp fall in the services PMI counter the upside news from the manufacturing sector earlier this week to push the composite PMI down to 50, its lowest level since the EU Referendum result.

“According to Markit, around these levels the PMIs are consistent with the economy stalling over the first quarter (chart 2), but that probably underestimates actual activity which began the year on a firmer footing according to official January GDP figures. However, further subdued survey readings would likely pose a headwind to growth in the second quarter”, said Lloyds Bank.

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