Economy stutters as EU uncertainty hits service sector

Uncertainty in the run up to next month's EU vote could see UK growth almost wiped out after figures yesterday showed the powerhouse services sector expanding at its weakest pace for more than three years.

Concerns over Brexit, which David Cameron is campaigning against, is hurting the economy. Picture: PA

In a “triple whammy” of gloom on the economy, the closely-watched Markit/Cips services purchasing managers’ index recorded a worse-than-expected reading of 52.3 for April – above the 50 no-change level but down from 53.7 in March and the lowest since February 2013.

It followed surveys earlier in the week revealing challenging conditions in the manufacturing and construction sectors amid fears over a Brexit and uncertainty caused by the EU vote.

Chris Williamson, chief economist at Markit, said the three reports signalled UK growth near-stalling, to just 0.1 per cent in April from 0.4 per cent in the first three months of the year. The early timing of Easter and chilly spring weather, as well as global growth concerns may also have hit the dominant services sector, according to yesterday’s survey.

UBS economist David Tinsley said: “The service sector PMI for April provided yet more evidence that the momentum in the UK economy is struggling under raised economic uncertainty, of which the forthcoming EU referendum is an important factor.

“Ahead of next week’s Bank of England monetary policy committee meeting the data is unwelcome. It tends to suggest that UK growth in the second quarter could come in significantly weaker than the 0.5 per cent quarter-on-quarter that the staff had previously been expecting.

“Indeed, if the weakening trajectory continues into May and June then our own forecast for a 0.3 per cent quarter-on-quarter growth rate may prove optimistic.”

Business leaders said the latest PMI figures may reveal more than referendum jitters.

James Sproule, chief economist at the Institute of Directors, said: “These figures will be put down to uncertainty over the EU referendum, but while this may explain part of the fall, we should also consider whether there are underlying factors feeding into a less rosy economic picture.

“The question we must ask is whether growth is built on solid foundations. My concern is that the exceptional period we are living in of low rates and cheap money is not the basis of a sustainable economy.”

The service sector data is seen as key to gauging the overall health of the UK economy, as it accounts for some three quarters of gross domestic product, although the PMI does not factor in retail.

New business levels lifted only slightly last month, remaining at the second-weakest in more than three years.

Services firms are also being squeezed by the recently introduced national living wage, which saw the strongest upward pressure on input prices since January 2014.