Subdued end to 2018 for service sector as Brexit uncertainty hits

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Subdued growth conditions persisted across the UK service sector at the end of 2018, with business activity rising at one of the slowest rates seen over the past two-and-a-half years, according to the latest IHS Markit/CIPS UK services purchasing managers’ index (PMI) report.

New work increased only marginally during December, which contributed to a slowdown in job creation to its weakest since July 2016. The main positive development for the service sector has been a softer pace of input cost inflation on average in the final quarter of 2018, as lower fuel prices helped to o set some of the pressure on operating expenses from rising staff wages.

The headline seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index registered 51.2 in December, up only slightly from the 28-month low seen in November (50.4). Reports from survey respondents suggested that Brexit-related concerns were a key factor weighing on business-to-business spending at the end of 2018. A number of firms also noted that subdued consumer demand had acted as a brake on sales in December.

Mirroring the trend for business activity, latest data indicated that growth of new work picked up only sightly from the 28-month low seen in November. Survey respondents commented on a headwind from political uncertainty and downbeat projections among clients in relation to domestic economic growth in 2019.

Another relatively weak rise in business and consumer spending contributed to a lack of new work to replace completed projects in December. This was highlighted by a drop in backlogs of work at service providers for the third month running, which is the longest period of decline since the summer of 2016.

Reduced pressure on operating capacity and e orts to cut costs contributed to so er employment growth across the service sector in December. The latest upturn in staffing levels was only marginal and the weakest recorded for almost two-and-a-half years. Nonetheless, there were still widespread reports that tight labour market conditions had made it difficult to recruit suitably skilled staff .

Higher wages were cited as a key factor leading to rising input costs at service providers in December. There were also reports that greater food prices and higher costs for imported items had pushed up operating expenses. The overall rate of cost inflation edged up only slightly from November’s six month low.

December data indicated a moderation in business optimism across the service economy for the third month running. Moreover, the degree of confidence towards business activity in the coming year is now the second-weakest recorded by the survey since March 2009. Worries about the impact of Brexit uncertainty on business investment and consumer demand remained by far the most prominent issues cited by survey respondents at the end of last year.