Services sector report shows slow demand as economists predict GDP growth of 0.1%

Brexit anxiety dragged the UK economy almost to a standstill at the end of 2018, with optimism among services companies dropping to the lowest levels since the financial crisis.

According to the latest snapshot of the services sector compiled by IHS Markit and the Chartered Institute of Procurement and Supply – which covers banks, restaurants and hotels – subdued growth conditions persisted in December, with concerns over the UK’s departure from the EU resulting in companies putting spending decisions on hold.

In an early warning sign that GDP growth almost stalled in the final three months of 2018, the purchasing managers’ index (PMI) showed lower demand from cash-strapped consumers also acted as a brake on sales.

Although the Markit/Cips services sector PMI rose slightly to 51.2 last month from 50.4 in November, the rate of increase in business activity was one of the slowest since the Brexit vote in 2016.

Economists said GDP growth in the final quarter would plunge to 0.1% from a rate of 0.6% in the third quarter, falling well short of the 0.3% expected by the Bank of England and the Treasury.

The latest report from the services sector, which covers about 80% of the UK economy, showed November and December marked the weakest two months for morale among businesses since March 2009 – the low point of the recession that followed the financial crisis.

Chris Williamson, the chief business economist at IHS Markit, said: “The service sector typically plays a major role in driving economic growth, but is now showing worrying signs of having lost steam amid intensifying Brexit anxiety.”

The manufacturing sector, which accounts for about 10% of the economy, recorded stronger growth last month as companies ramped up their stockpiling to protect against the risk of a no-deal Brexit in less than 90 days’ time.

While the services PMI provides an early warning indicator, and is watched closely by the Bank and the Treasury, it reflects businesses reporting worse conditions rather than any exact details of slowing growth. Official growth figures for the fourth quarter of 2018 will not come until early February.

Duncan Brock, the group director at Cips, said: “Businesses remain under the Brexit cosh. Indecision is squeezing the life out of activity.”