The services sector contracted for the first time in eight years in July, indicating growing concerns about the impact of Brexit.
The latest services Output Index, which tracks the sector’s business output, recorded a drop of more than two points in services output last month, from 96.85 to 94.73 – well below the 95.0 point of contraction. This has pushed the survey into negative territory for the first time since early 2010.
There were contradictory reports from respondents as to the reason behind the growth slowdown. Some businesses said they saw an increase in demand. This was particular prevalent amongst the tourism-related industries. This group also said the unusually dry summer had a positive impact on their sales.
Others, however, said the hot weather and the football World Cup had impacted business operations and reduced customer footfall.
Labour market conditions and rising wage pressures were also cited as being key challenges for service sector companies, which contributed to the slowest pace of job creation since August 2016.
On the upside, however, output for manufacturing – which makes up 10 per cent of UK business – managed to hold its own. The manufacturing output index fell slightly from 100.82 to 100.16, but remains above the long-term growth trend of 100.
Commenting on the findings, IHS Markit Associate Director Tim Moore, says: “The service sector moved back into the slow lane in July as business activity growth lost momentum for the first time since the start of spring.
“While it’s difficult to quantify the precise impact of the recent heat wave on overall business performance, some survey respondents reported that a combination of hot weather and the World Cup had weighed on consumer footfall. These short-term disruptions and a general slowdown in new business growth appear to have offset the boost to tourism-related activity from the extended dry period in July.
“Looking at demand fundamentals, service providers commented that Brexit uncertainty had held back new project wins, reflecting risk aversion and a wait-and-see approach to investment spending among international clients.”
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