UK economy 'loses momentum' as services growth slows

Growth in the UK's service sector eased to a five-month low in February, according to a closely watched survey.

The Markit/CIPS purchasing managers' index (PMI) for services fell to 53.3, down from 54.5 in January. However, it remains above the 50 threshold that separates growth from contraction.

Markit estimates the economy will grow by 0.4% in the first quarter of 2017.

The economy has "lost momentum" after "impressive" growth at the end of 2016, said Chris Williamson of IHS Markit.

Services, which include areas such as finance and hospitality, make up more than three-quarters of the UK economy.

Markit said the sector had been stung by the steepest rise in costs for more than eight years as a result of the weak pound.

This is likely to mean that inflation faced by consumers "has significantly further to rise", said Chris Williamson, chief business economist at IHS Markit.

Latest official figures showed that inflation hit 1.8% in January, but Mr Williamson said the rate was expected to hit 3% over the next year.

Economic headwinds

The services PMI figure was slightly below expectations, with analysts forecasting a reading of 54.1.

Earlier in the week, a similar survey of manufacturers had also suggested a slowdown last month.

"A further slowdown in UK business activity growth in February adds to evidence that the economy has lost momentum after the impressive expansion seen at the end of last year," said Mr Williamson.

"Inflationary pressures remained the highest for six years as firms struggled with rising costs associated with the weak pound, but optimism about the year ahead remained elevated by recent standards."

Paul Hollingsworth, UK economist at Capital Economics, said: "The economy faces a number of headwinds including higher inflation and uncertainty surrounding the future relationship with the EU as formal negotiations get underway."

"However, we continue to think that the UK will weather these well, and expect GDP growth of 1.8% in 2017 and 2.5% in 2018."

The pound declined after the news was released. Sterling fell 0.3% against the dollar to $1.2233 and was 0.5% lower against the euro at 1.1621.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "We continue to expect quarter-on-quarter GDP growth to average just 0.2% this year, ensuring that the [Bank of England's Monetary Policy Committee] holds back from raising interest rates despite high inflation."

The combination of lower growth with higher expected inflation could herald a period of "stagflation", he added.