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The biggest part of the UK economy is doing better than expected — but is still close to stagnation

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
The service sector covers everything from banking to pub work. Photo: CARL COURT/AFP/Getty Images

Businesses in the UK service sector are more optimistic about conditions than economists had thought, according to a closely watched survey.

IHS Markit’s Purchasing Managers Index (PMI) came in at 51.3 for February. The survey asks businesses their opinion on current and future business conditions and the index it produces measures expected growth in the sector: anything above 50 means growth, while below indicates contraction.

The 51.3 reading compared to economists’ forecasts of 49.9. It also shows an improvement in business conditions since January, when IHS Markit’s services PMI came in at 50.1.

However, the survey’s authors cautioned against interpreting the results positively.

“Once again this month, the lifeblood of the sector continued to leak away with Brexit indecision striking another blow to new orders and employment in February,” Duncan Brock, group director at the Chartered Institute of Procurement & Supply, which helped to compile the survey, said.

Employment in the service sector declined at the fastest pace in seven years in February, the survey found.

“Any hoped-for progress next month looks like it will be equally stifled, as services activity heads for its weakest quarter since late 2012,” Brock said.

IHS Markit said that “Brexit-related uncertainty remained by far the most prominent factor acting as a brake on business activity growth.”

The service sector is the biggest part of the UK economy, representing around 70% of economic activity. It covers everything from banking and consultancy, to hotel management and table waiting.

Business activity in the service sector remains near stagnation. Photo: IHS Markit/CIPS

“The latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU,” Chris Williamson, chief business economist at IHS Markit, said. “The data suggest the economy is on course to grow by just 0.1% in the first quarter.

“Worse may be to come when pre-Brexit preparatory activities move into reverse.”

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said PMI data is often too pessimistic about the economy.

“The PMIs are rarely spot on; they have been wide of the mark by an average of 0.3 percentage points since 2004,” he said in an email. “In addition, they were far too downbeat immediately after the referendum, suggesting that they tend to overstate the impact of political uncertainty on the economy.”

Earlier this year, UBS’ chief economist Paul Donovan told journalists he thought survey data was becoming less reliable.

Tombs said he still forecasts GDP growth of 0.2% in the first quarter of 2019, slightly better than the PMI numbers suggest.

The pound was largely unmoved on the news, up around 0.1% against both the euro (GBPEUR=X) and the dollar (GBPUSD=X).