Service sector growth slows in UK and eurozone

Slowing growth in UK economic activity continued to contrast with evidence of a sustained recovery in the eurozone, according to surveys of British and European purchasing managers on Wednesday.

The UK purchasing managers' index (PMI) for the services sectors in June slipped to 53.4 from 53.8 in May, and failed to match market expectations of 53.5.

While a number above 50 indicates that business activity continued to expand, the dip shows that it grew at a slower rate – the slowest pace of growth since February.

New order growth stalling

Managers reported the weakest upturn in new orders since September 2016 and optimism about economic prospects for the year ahead fell to an 11-month low.

The survey of the service sectors marked a trio of below par PMI results this week, starting with manufacturing PMI on Monday and a disappointing construction sector PMI on Tuesday.

Uncertainty over Brexit negotiations is hampering business investment and economic optimism - Source: Shutterstock

Market commentators suggested optimism had been hit by political uncertainty following the general election and the start of Brexit negotiations.

Consumer slowdown

Meanwhile, consumer demand was being strangled by higher rates of inflation and lower wage increases.

"The overall picture is one of business spending, investment and exports failing to provide sufficient impetus to fully offset the consumer slowdown," said Chris Williamson at IHS Markit, compiler and publisher of the PMI surveys.

Output data confirm weak Q1

UK productivity data from the Office for National Statistics confirmed the first quarter's weak growth as output fell 0.5% compared with the fourth quarter of 2016.

Despite the weaker survey data, however, second-quarter growth remains on track to improve on the disappointing 0.2% growth seen in the first three months, analysts said.

"When taken together with other survey evidence and the hard data so far, we think that GDP growth accelerated to around 0.5% in the second quarter," said Scott Bowman, UK economist at Capital Economics.

Eurozone activity

In contrast, eurozone PMIs have exhibited strong levels of activity which, in most business sectors, continues to accelerate.

Manufacturing led the region’s pick-up in business activity in June and services, although a little slower, also made a strong contribution to growth.

Eurozone's services PMI at 55.4, comfortably beat May's flash estimate of 54.7, but this figure was revised up to 56.3, leaving the June number a little lower.

"The dip in the PMI in June certainly doesn’t look like the start of a slowdown," said Williamson at Markit.

He added: "Growth of new orders accelerated to reach the second highest in just over six years, and companies are struggling to satisfy this increase in demand."

Market reaction

Currency market reaction, however, favoured sterling.

While both the euro and the pound were a little lower against the dollar, the pound climbed 0.2% against the euro to €1.1403 by midday, reflecting growing expectations the Bank of England will pull the interest rate trigger before the European Central Bank.

"For the past few months the BoE has been stepping up its hawkish signals to markets," said Kallum Pickering, senior UK economist at Berenberg. "We see a 40% chance of a rate hike before this year is over."