Fears of a Brexit hit disappear for UK services managers despite big costs increases slowing activity
Business expectations of future growth in the UK’s dominant services sector have recovered to their pre-referendum levels, as Brexit fears dissolve despite the looming start of trade negotiations, according to a survey of managers.
However, the pound dropped sharply as current activity slowed more than economists had predicted. The spot exchange rate fell to lows of $1.2476 against the US dollar immediately after the figures were released.
The overall index of current output slowed to 54.5, a fall from December’s 17-month peak of 56.2, according to the purchasing managers’ index for the services sector compiled by IHS Markit. A measure above 50 indicates an expansion in the services economy.
Read more: Dominant UK services sector reaches 17-month economic activity high
Despite the fall in current activity services firms, which produce almost 80 per cent of the economy's output, have grown more confident about activity over the next year.
Confidence in prospects plummeted after the referendum result, but the UK economy has been relatively healthy since then, with no slowdown in growth.
Chris Sood-Nicholls, managing director and head of global services at Lloyds Bank Commercial Banking, said: “Business confidence has also been buoyed by a stronger than expected economic performance in 2016, and is likely to be further boosted by yesterday’s improved growth forecast from the Bank of England.”
However, economists are watching the UK economy closely for signs of a fall in activity. Growth in the services sector has been limited by the continued pass-through of inflation, as the devaluation of sterling after the EU referendum result makes imports markedly more expensive.
Read more: Brace for a hit to your pocket as inflation spikes this year
The survey shows input prices above 60 for the fourth month in a row, indicating very strong inflation. This reflects official producer price inflation, which indicates prices rising at a 2.7 per cent annual rate in December.
The rise in prices is expected to accelerate as currency hedges expire and firms are forced to use weaker sterling for purchases.
Dean Turner, UK economist at UBS Wealth Management: “Higher input prices will, in time, shift into selling prices otherwise firms will see their profits shrink. In line with the manufacturing and construction PMI, this points to inflation continuing its recent surge in the months ahead.”