Britain’s dominant services sector contracted during March, pushing overall growth to its lowest level since 2012, according to a survey of executives.
IHS Markit’s services purchasing managers’ index fell to 48.9 in March from 51.3 in February. Anything below 50 indicates a contraction.
The figures were below analysts' expectations of 50.9, according to a Thomson Reuters poll, and was the first time the survey had pointed towards a contraction since July 2016 – in the wake of the Brexit referendum.
Businesses who responded to the survey blamed political uncertainty for the decline as clients would not commit to new projects until the turmoil in Westminster was resolved.
Combined with similar polls for the manufacturing and construction sectors, the survey suggests that the UK is in line for its worst quarterly growth figure since 2012 during the first quarter of the year, Markit said.
The reading came as Brexit politics were shown to be making their presence felt on UK asset markets, lifting sterling and putting the break on the FTSE 100 and drawing investors out of UK government debt.
Sterling's strength tracked expectations that the chances of a disorderly departure from the EU are diminishing, with Theresa May seeking a further extension to the deadline on Brexit as she looks to reach an agreement on terms of withdrawal with the main opposition Labour Party. Any such accord is thought likely to leave the UK in the EU's customs union, one of the softest forms of departure from the bloc.
Pound strengthened
The rally took sterling back toward the $1.32 mark it has held above for most of March. In morning London trade on Wednesday, it was up 0.4 per cent at $1.3176, a four-session high. Against the euro, the pound strengthened by 0.1 per cent, with a unit of the shared currency costing 85.21p. After the services data was released, it ticked back down a shade to 85.32p against the euro.
David Lamb, head of dealing at Fexco Corporate Payments, said Mrs May's "eleventh hour change of course" had set sterling off to a strong start on Wednesday, with the "woeful" services data only briefly derailing this.
“The markets had expected a slowdown rather than a slide, so such a woeful performance by Britain’s dominant service sector briefly spooked pound watchers,” Mr Lamb said.
“Ordinarily, news that the sector which produces four fifths of UK GDP has slumped into negative territory for the first time in two and half years would set alarm bells ringing and send sterling south,” he said of the services data.
“But not today. It says much about how Britain’s tortuous Brexit process now trumps any and all economic data that sterling shook off this setback with such ease.” – Copyright The Financial Times Limited 2019
