Election jitters, consumer squeeze hit Britain's services sector

The UK economic growth slowed to 0.2% in the first three months of this year

Britain's services sector grew less than expected and car sales dropped last month, as businesses and consumers put off big decisions before this week's national election, dampening expectations of a strong rebound from a weak first quarter.

British economic growth slowed to just 0.2% in the first three months of this year — the weakest among the world's top advanced economies — as the cost of the pound's fall following last year's Brexit vote caught up with consumers.

Many economists have said they expect growth in the current quarter to partially rebound to around 0.4 or 0.5%, but some said that weakness in Monday's services purchasing managers' index (PMI) made this less likely.

"The pullback in the services PMI in May from April's four-month high is a setback to widespread hopes that the economy's slowdown in the first quarter will be fleeting," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Financial data company IHS Markit, which published the survey, said the services PMI hit a three-month low of 53.8 in May, down from 55.8 the month before and at the low end of forecasts in a Reuters poll of economists.

"Optimism about the year ahead is running below the long-run average, weighed down principally by concerns over Brexit, political uncertainty and weaker spending by households," IHS Markit economist Chris Williamson said.

Separate figures from British car dealers and manufacturers showed new registrations last month were more than 8% lower than a year before. The Society of Motor Manufacturers and Traders said this reflected pre-election uncertainty, as well as tax rises that took effect in April.

There was a little move in sterling after the data, which came as markets digested the impact of Saturday's van and knife attack on London Bridge, as well as opinion polls showing Prime Minister Theresa May's lead has continued to shorten.

Services Drag Down Average

The large size of Britain's services industry means its decline outweighed last week's stronger-than-expected surveys for manufacturers and construction firms, dragging the all-sector index to its lowest since February as well.

Britain was one of the fastest-growing major advanced economies last year, and since then the number of people in work has risen to a record high — a fact May has highlighted as she campaigns for re-election.

But the opposition Labour Party has homed in on how wages are now rising more slowly than prices, after a pick-up in inflation driven largely by sterling's fall of more than 10% since last year's Brexit vote.

The services PMI does not cover retailers, who suffered their worst quarter since 2010 in the first three months of the year and appear to have struggled again last month after a brief respite in April.

The Bank of England has shown little interest in raising interest rates to tackle what it sees as a temporary spike in inflation this year to just under 3%, especially as it expects growth to slow next year as Brexit nears.

The services PMI suggested inflation may be starting to ease in the sector. Average prices charged rose at the slowest pace since November, while corporate costs grew at the slowest rate in eight months, despite a pick-up in salaries.

But new orders flowed in at the slowest pace since February. Some businesses said it was probably a temporary lull as customers delayed decisions until after the election. Others said there was heightened concern about the economic outlook as well as "intense competition" for new work due to squeezed consumer budgets.

Also on Monday, Britain's main body for manufacturers revised up its forecast for growth in the sector to 1.3% this year from 1%, citing a stronger world economy, but said they expected this to slow to 0.5% next year as Brexit nears.