UK services PMI subdued as Brexit uncertainty mounts

When the UK releases its first estimate of second quarter growth on Friday, most of the focus will be on how much the stockpiling effect unwound after the inventory-building frenzy of the first quarter.

Even when this noise is stripped out though, the underlying picture remains pretty lacklustre. Admittedly, the latest services PMI was a little better than hoped, at 51.4. This was partly driven by better flows of new orders from overseas, according to Markit/CIPS. But with Brexit uncertainty mounting, the fact that expectations for the year ahead dipped to the lowest level since March underlines the challenges facing the sector over coming months.

One of the major risks to the service sector – as well as the economy as a whole – comes from investment. Friday’s GDP figures may well reveal that business spending resumed its downward trend, a pattern that is likely to continue for the rest of the year. Brexit uncertainty is limiting appetite to expand, but contingency planning activities ahead of 31 October may also limit resources available for possible investment projects. As the Bank of England noted last week, this appears to be reducing demand for the associated professional and financial services – and activity in these areas has slowed in recent months.

Having said all of that, one positive from this latest PMI is that retail reportedly performed a little better in July. Consumer spending appears to have been more subdued during the second quarter, despite the modest improvement in real wage growth over recent months. Sentiment among shoppers has remained fairly depressed, hinting at a reduced willingness to make bigger ticket purchases.