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'Sluggish' Services Growth May Knock GDP

A slight rise in service sector activity in March will not be enough to prevent a decline in UK GDP growth during the first quarter of 2016, analysts have warned.

The Markit/CIPS Purchasing Managers' Index for services came in at 53.7 last month - up from 52.7 in February. However, the survey's reading remained at a three-year low on a quarterly basis.

While a figure above 50 represents an expansion in activity, Markit (NasdaqGS: MRKT - news) said growth was being hampered by a number of uncertainties including the EU referendum and weaknesses in the world economy.

Its chief economist, Chris Williamson, said: "An upturn in the pace of service sector growth in March was insufficient to prevent the PMI surveys from collectively indicating a slowdown in economic growth in the first quarter.

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"The surveys point to a 0.4% increase in GDP, down from 0.6% in the closing quarter of last year.

"Across the three main sectors of the economy ( manufacturing , construction and services), firms reported the smallest increase in demand for just over three years, which in turn fed through to a reluctance to take on new staff.

"March saw the weakest rate of job creation for over two-and-a-half years."

Scott Bowman, UK economist at Capital Economics, believed the first quarter GDP figure could be even weaker than Markit was now predicting.

However, he said: "In the near term, uncertainty ahead of the EU referendum – a factor cited by survey participants as undermining business expectations this month – and a ramp-up in the fiscal squeeze could keep a lid on activity.

"But with consumers' real earnings still rising quite strongly and confidence remaining high, growth should resume a solid pace over the rest of the year."

The report was released as the head of the International Monetary Fund, Christine Lagarde, urged world leaders to accelerate spending plans to help bolster the global economy.

Speaking at an event in Frankfurt ahead of the IMF's Spring Meeting in Washington later this month, she said there was a growing risk of "mediocre" as "recovery remains too slow, too fragile, and risks to its durability are increasing".

She (Munich: SOQ.MU - news) cited geopolitical, as well as economic, threats including those from terrorism and the effects of the migrant and refugee crisis.

Ms Lagarde hinted that the effects of the slowdown in China and other emerging markets could also lead to a further downgrade in world growth expectations in the fund's latest Economic Outlook.