Inflation, Election Jitters Take a Toll on U.K. Services

(Bloomberg) -- U.K. services activity cooled more than economists expected in May, as election uncertainty and tightening household budgets weighed on demand.

IHS Markit's Purchasing Managers Index fell to 53.8 from 55.8 in April. That's the weakest since February and below the reading of 55 forecast in a survey, though still above the 50-mark dividing expansion from contraction.

The report contrasts with stronger-than-expected surveys on construction and manufacturing last week. Markit said the three snapshots together point to the economy expanding at a 0.5 percent rate after growth slumped to 0.2 percent in the first three months of the year.

While there are downside risks to the near-term outlook, “the surveys indicate that the economy has regained some momentum in the second quarter,” said Markit Chief Business Economist Chris Williamson.

New orders weakened because of the pinch on consumers from rising prices and delayed decision-making ahead of the June 8 general election, Markit said. These factors restrained business optimism, which rose only marginally from a five-month low.

“This fits with the established narrative for the U.K. economy that it is a consumer-led slowdown restricting growth as inflation runs ahead of pay growth,” said Sam Hill, an economist at RBC Capital Markets in London. “We expect the fragility of the consumer to remain a headwind throughout the rest of 2017 at least.”

The squeeze on incomes left firms facing “intense” competitive pressures, restricting their scope to raise prices, the survey found. Prices charged rose at their slowest pace since November.

At the same time, input-cost inflation slowed further from its peak in February, suggesting the pressure from rising import prices -- the result of the weak pound -- could be beginning to fade.

--With assistance from Mark Evans and Harumi Ichikura

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson, Lucy Meakin