Service sector growth stalls to 19-month low

Growth in the UK services sector ground to a 19-month low in July as the relentlessly bleak economic news shows no sign of stopping.

The service sector accounts for more than two-thirds of activity in the UK economy and a slow in growth means that there is unlikely to be an early upward bounce from the 0.7 per cent contraction seen from the first estimate of GDP in the second quarter.

The purchasing managers index fell from 51.3 in June to 51.0 in July. A reading of more than 50 indicates expansion in the sector.

Analysts had hoped for an improved reading of around 53.0 as the sector made up some of the productivity lost as a result of the extra bank holiday from the Queen’s Diamond Jubilee. However, the data indicates that this did not happen.

Paul Smith, Senior Economist at survey compilers Markit, said: “Slower growth of activity is somewhat disappointing following the disruption of the Queen’s Jubilee in June.”

The report suggested that “temporary factors and a tough economic climate continued to weigh on activity and business.”

The report indicates that input costs continue to increase and that margins are becoming tighter.

Paul Smith said that the combined PMI data for the Manufacturing, construction and services sector had fallen to a 39-month low. He said: “Combining the latest services data with figures from the sister construction and manufacturing surveys, the All-Sector PMI dropped below 50.0 for the first time in 39 months in July.”

Howard Archer, Chief UK & European Economist at IHS Global Insight said: “This is a serious blow to hopes that the economy can bounce in the third quarter after dismal GDP contraction of 0.7% quarter-on-quarter in the second quarter.”

Mr Archer believes the weak PMI data from all sectors makes further quantitative easing likely.

He said: “The survey reinforces expectations that the Bank of England will have to take further stimulative action to try boost the economy. We expect another £50 billion of Quantitative Easing in November.”

Free guide to savings and investments

Follow Myfinances.co.uk on Twitter: @news_myfinances

Sign up to the Myfinances.co.uk newsletter to receive the latest financial news direct to your inbox.