Inflation and election uncertainty slow services sector growth in May

Activity in the services sector eked out its slowest growth since February and came in shy of expectations as inflation and General Election uncertainty took its toll last month.

The closely watched Markit/CIPS services purchasing managers' index (PMI) fell to 53.8 in May, down from 55.8 in April and below economists' expectations of 55.0.

A reading above 50 indicates growth.

The powerhouse industry, which accounts for around 78% of the UK economy, saw output ease back from April's four-month high after the demand for new orders slipped.

The drop was triggered by a squeeze on household spending following the rise in the cost of living, while clients also put decisions on pause ahead of the General Election result.

It comes after PMI reports for the manufacturing and construction industries beat expectations for May after delivering solid performances.

Chris Williamson, chief business economist at IHS Markit, said: "Despite slower growth in May, the surveys indicate that the economy has regained some momentum in the second quarter.

"The three PMI surveys are running at levels that are historically consistent with GDP growing at a robust 0.5% rate, albeit with the slowing in May posing some downside risks to the near-term outlook.

"Optimism about the year ahead is running below the long-run average, weighed down principally by concerns over Brexit, political uncertainty and weaker spending by households.

"However, at the moment firms generally remain upbeat and very much in expansion mode: the employment indicators from the three PMI surveys are consistent with around 30,000 private sector jobs being added each month."

Despite the slowdown in activity, business conditions for firms improved in May, with input cost inflation dropping to an eight-month low.

Jobs growth rose for the 10th month on the bounce and 44% of firms expect activity to rise in the year ahead, while 8% are predicting a decline.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, questioned how much of an impact the General Election was having on the services sector.

He said: "The pullback in the services PMI in May from April's four-month high is a setback to widespread hopes that the economy's slowdown in the first quarter will be fleeting.

"Both business activity and orders increased at their weakest rates since February. Some respondents reported that clients were delaying decisions until after the General Election, but we see no past evidence that the PMI or GDP growth has been adversely affected by elections."

Official figures last month showed the UK economy suffered an even deeper slowdown at the start of the year, as the services sector came under pressure and inflation dealt a blow to household spending.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.2% in the first quarter of 2017, revising down the figure from its initial estimate of 0.3%.

The services sector put downward pressure on GDP after output for the industry was revised down to 0.2% from 0.3% for the first quarter.

Sterling's slump since the Brexit vote has bumped up the cost of living as manufacturers and retailers pass down rising import prices to consumers.

Inflation hit its highest level in nearly four years in April at 2.7%, as the Brexit-hit pound, electricity price hikes and rising air fares tightened the squeeze on household spending.

Howard Archer, chief economic adviser to the EY Item Club, said: "Overall, it is still possible that GDP growth could improve to 0.5% in Q2 from 0.2% in Q1, but downside risks have increased.

"Markedly softer services activity was the main factor behind the sharp slowdown in UK GDP growth in the first quarter, and, while the services sector does appear to have seen some pick-up in the second quarter, it is clearly firing more intermittently than in 2016."