The prospect of Britain voting to leave the European Union sent shivers through the boardrooms of the country’s dominant services sector last month, driving growth to a near three-year low.
New orders in the sector rose in February at the weakest pace since early 2013, prompting companies to cut the rate of hiring to levels last seen two and a half years ago, a survey showed on Thursday.
“Survey responses reveal that firms are worried about signs of faltering demand, but boardrooms have also become unsettled by concerns regarding the increased risk of ‘Brexit’, financial market volatility and weak economic growth at home and abroad,” said Markit’s chief economist, Chris Williamson.
It was the first time Markit, which compiles the influential index, cited the outcome of the June 23 referendum on Britain’s EU membership as a factor denting business expectations.
The Markit/CIPS UK services purchasing managers’ index - a survey of industry sentiment and plans - slumped to 52.7 from 55.6 in January, the weakest reading since March 2013.
A reading above 50 still denotes growth, but Thursday’s survey was the starkest sign to date that Britain’s recovery from the financial crisis is losing momentum and shows why Bank of England policymakers have said they stand ready to boost the economy if needed.
Gross domestic product now looks on track to expand by just 0.3 per cent in the first quarter of 2016, according to Markit, a slowdown from 0.5 per cent in the final three months of 2015 and its poorest performance since late 2012.
Last month, the Government announced the date of the referendum and London mayor Boris Johnson backed the ‘Out’ campaign - events which “exacerbated an undercurrent of unease about Europe that was already there”, added Mr Williamson.
Bank of England policymakers have said they have not yet observed businesses holding off on investment plans due to uncertainty around the referendum, but the latest PMI is likely to catch their eye.
“The extent of the slowdown will be a shock to policymakers and surely puts to bed any talk of the Bank of England raising interest rates,” said Mr Williamson.
The UK all-sector PMI, which includes weaker-than-expected manufacturing and construction surveys published by Markit earlier this week, fell to 52.9 in February from 56.1 in January, hitting its lowest level since April 2013.