UK services hit by looming Brexit vote and fiscal squeeze

The UK economy is likely to have expanded by a solid but “unexciting” 0.5 per cent in the final three months of last year after growth in the country’s dominant services sector dipped slightly in December, according to the research group that compiles the purchasing managers’ index surveys of activity.

The sector, which accounts for more than three-quarters of economic activity and ranges from shops and hotels to banking, maintained its solid growth in the run-up to Christmas, but the survey found that expectations for business activity over the next 12 months was the weakest for almost three years.

The latest Markit/CIPS service sector purchasing managers’ index (PMI) fell to 55.5 from 59.9 in November, but was still above average. A figure above 50 indicates growth in the sector.

The economy now appears to have grown by 0.5% in the fourth quarter, Markit said, down from its estimate last month of 0.6%.

“The relapse in the services PMI adds to evidence showing the recovery lost further momentum towards the end of 2015,” Pantheon Macroeconomics chief UK economist Samuel Tombs said.

Financial markets showed little reaction to the news, which left Britain still in a better position than most of its euro zone peers.

But Mr Williamson, chief economist at Markit, warned that “a rosy outlook” was not guaranteed.

“With business expectations about future workloads dropping to the lowest for almost three years, firms are becoming more cautious in the face of growing uncertainties. The cost impact of the living wage, government spending cuts, a potential hike in interest rates, global economic growth jitters and, of course, Brexit are all weighing on business minds and pose significant downside risks to economic growth in 2016,” he said.

“The pace of hiring has already slowed accordingly as firms scale back expansion plans in what might be seen as a warning shot to those taking a complacent view of economic prospects for the coming year.”

Vicky Redwood, chief UK economist at the consultancy Capital Economics, agreed that significant headwinds would restrict GDP growth this year. “The recovery seems unlikely to pick up significant pace this year as it is battling the renewed fiscal squeeze and uncertainty ahead of the EU referendum,” she said.