Growth in the UK's dominant service sector surprised analysts by expanding to a nine-month high in July, according to the latest Purchasing Managers' Index (PMI). The IHS Markit/CIPS PMI for the sector showed a reading of 51.4 in July, up from 50.2 in June in an index where a reading of about 50 shows expansion.Chris Williamson, chief business economist at IHS Markit, said, “An improved rate of growth in the service sector to the highest since October is welcome news after other PMI surveys showed the sharpest drop in manufacturing output for seven years and a construction sector that is mired in its deepest downturn for a decade.“However, the overall picture is one of an economy that is only just managing to skirt recession, with July's performance among the worst since the height of the global financial crisis in 2009. Even growth in the service sector remains worryingly subdued, constrained by a marked fall in business services activity, where the rate of decline in July has been exceeded only once in the past ten years.”

Business services are 'under pressure'

The best performing sector was consumer services, while the fall in business services activity in July represented a rate of decline that has been exceeded only once in the past ten years.James Smith, developed markets economist at ING, said that services were likely to remain under pressure for some time to come, with business investment set to fall further as Brexit uncertainty increased. “When the UK releases its first estimate of second-quarter growth on Friday, most of the focus will be on how much the stockpiling effect unwound after the inventory-building frenzy of the first quarter,” he said.“Even when this noise is stripped out though, the underlying picture remains pretty lacklustre. Admittedly, the latest services PMI was a little better than hoped. This was partly driven by better flows of new orders from overseas, according to Markit/CIPS. But with Brexit uncertainty mounting, the fact that expectations for the year ahead dipped to the lowest level since March underlines the challenges facing the sector over coming months,” Smith added.

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Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said, “While services activity grew in July, this marginal improvement on last month is a smokescreen. Fundamental weaknesses remain in a sector pinned down by Brexit uncertainty and increasingly stagnant global economic growth.”

Trends across Europe

There was also disappointing news from Germany where the composite PMI for services and manufacturing came in at a six-year low in July of 50.9, down from 52.6 in June. Manufacturing contraction deepened, with the PMI for the sector down to an 84-month low of 43.2, while the services index dropped to a six-month low, but still stood at a healthy 54.5.Across the eurozone, there was a continuation of a slowdown, reflecting the stagnation in the global economy. IHS Markit said, “The most prominent encapsulation of these trends was seen in Germany, where a rapidly deteriorating manufacturing economy almost entirely offset ongoing robust growth of the service sector. Latest composite data showed Germany expanding at its slowest rate for over six years.“Italy fared little better than Germany, despite growth improving slightly to a four-month high. Modest growth was seen in Spain, but still the weakest in nearly six years. France performed best, although even here the rate of expansion was relatively subdued and well below trend.”

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