Investing.com – Activity in the UK service sector dropped more than expected in August, hitting an 11-month low and dampening optimism over the British economy as the sector makes up approximately 80% of gross domestic product, industry data showed on Tuesday.
In a report, market research group IHS Markit said the seasonally adjusted IHS Markit/CIPS services purchasing managers’ index (PMI) decreased to 53.2 last month from a reading of 53.8 in July. That was its lowest reading since September 2016.
Analysts had expected the index to slip to just 53.5.
On the index, a level above 50.0 indicates expansion in the industry, below 50.0 indicates contraction.
The research group indicated highlighted in the report that input cost pressures had picked up in August.
However, despite the weak activity levels, job creation in the service sector strengthened to a 19-month high.
IHS Markit chief economist Chris Williamson pointed out that the combination of the three surveys –services, manufacturing and construction- pointed to the weakest overall expansion in six month.
“Although the latest two months’ data put the economy on course for another 0.3% expansion in the third quarter, momentum is being gradually lost,” he warned.
“Robust manufacturing growth means the economy may be rebalancing towards goods production, aided by the weaker pound, but the slowdowns in services and construction send warning signals about the health of the economy,” Williamson explained.
This expert attributed the subdued overall level of optimism to Brexit uncertainty and warned that it was close to levels that have previously indicated that the economy was close to stalling or even contracting.
“While a rise in price pressures will add to worries that inflation could pick up to perhaps 3% again in coming months, the overall level of the PMI remains more consistent with policymakers erring towards stimulus rather than hiking interest rates, suggesting the doves will continue to outnumber the hawks,” Williamson concluded.
Following the report, GBP/USD was trading at 1.2925 from around 1.2922 ahead of the release of the data, EUR/GBP was at 0.9192 from 0.9191 earlier, while GBP/JPY traded at 141.50 compared to 141.52 previously.
Meanwhile, European stock markets traded higher, with London’s FTSE 100 gaining 0.32%. The Euro Stoxx 50 rose 0.54%, France's CAC 40 traded up 0.40%, while Germany's DAX advanced 0.90%.