LONDON (dpa-AFX) - UK service sector shrunk for the first time in over two-and-a-half years in March as domestic political uncertainty damped demand amid labor shortages, survey data from IHS Markit showed on Wednesday.
The services purchasing managers' index, or PMI fell to 48.9 in March from 51.3 in February. Economists had expected a score of 51.
A reading below 50 suggests contraction in the sector. The services PMI reading fell below 50 for the first time since July 2016.
Aside from the brief dip seen after the EU referendum, the latest reading was the joint weakest seen over the past decade and equaled the previous low point recorded in December 2012, IHS Markit said.
The composite PMI dropped to 50 in March from 51.4 in February. Economists were looking for a score of 51.2.
In March, manufacturing witnessed an upturn due to continued stockpiling by businesses ahead of Brexit, while services and construction sectors logged weaker levels of activity.
In the service sector, clients chose to wait for some clarity on Brexit before committing to new projects. New orders declined for a third successive month, marking the longest stretch of falling sales volumes since the first half of 2009. Export demand continued to weaken.
Backlogs fell for a sixth month in a row, which was the longest run of declines since early-2013.
However, employment rose slightly in March after falling in the previous months. That said, firms continued to report that shortages of labor had limited the scope for hiring.
Operating costs rose in March, pushed up by higher staff wages, transport costs and energy prices. Input price inflation was largely unchanged from February's nine-month low.
Selling prices rose marginally and the rate of output price inflation was the weakest since June 2017. Subdued demand led to squeezed margins and pressure to match discounting by competitors.
Business expectations remained subdued and the degree of optimism rose to its highest level since last October. Some firms hoped for greater clarity about the path to Brexit.
'A drop in service sector activity indicates that UK GDP contracted in March, with the economy stalling over the first quarter as a whole and at risk of sliding into a deepening downturn in coming months,' IHS Markit Chief Business Economist Chris Williamson said.
A stalling of the economy in the first quarter will therefore likely turn into a downturn in the second quarter unless demand revives suddenly which seems highly improbable, given the recent escalation of Brexit uncertainty, the economist said.
Hence, the current consensus forecast for the UK economy to grow 1.3 percent this year looks far too optimistic, he added.
'IHS Markit currently expects to see just 0.8 percent growth in 2019, and even this modest performance is perhaps somewhat hopeful given the recent lack of any Brexit developments,' Williamson said.
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