Service sector slowdown a worry at home and abroad

A worrying slowdown in services in Britain was compounded by weakness in the same sector in China.

Britain was given another reminder of its sluggish pace of growth on Monday with a sharp fall in activity in the services sector, but it is not the only country seeing weakness in its biggest sector.

The Markit/CIPS (Chartered Institute of Purchasing and Supply) Purchasing Managers Index (PMI) for August slowed to 51.1 from 55.4 in July. The fall was the biggest since April 2001, when the outbreak of foot-and-mouth disease among livestock had a severe but temporary effect on economic activity.

The services sector is by far Britain’s biggest, accounting for more than three quarters of the economy, so the weak data is bad news. The services sector includes activities as diverse as restaurants and banking.

Meanwhile, China, which is expected to continue being the engine of global economic growth in coming years, saw its services PMI for August fall to 50.6 from 53.5 in July. Services account for less than half of China’s economic output, but the figure is still a worry.

The slowdown in China was due in part to fiscal tightening measures, which the fast-growing economy has implemented to try and keep a lid on inflation.

According to HSBC, which helped compile the figures for China, resilient consumer spending and a strong property market mean that the services sector is “is likely to see a moderation in growth, and not a meltdown.”

One common theme between the British and Chinese data is that providers of services are suffering from cost inflation and struggling to pass these costs onto the consumer, an illustration of how tight things are.

While China will continuing growing at a fast pace, even if this moderates, it is a worrying development. Slower growth in China and other emerging markets could signal trouble for British and other western consumer-based firms, many of which have relied on strong overseas growth to offset weakness in home markets.

In the FTSE 100 index of leading shares, several leading firms have benefited from the growth of the middle class in China and other developing countries, with people becoming more and more brand conscious. These companies, to name just a few, include British American Tobacco, the maker of Lucky Strike cigarettes, Unilever, whose food and household goods include Magnum ice creams and Dove soap, and SABMiller, the brewer behind Peroni and a host of other beers.

In a sense, the weak services data in China is just as worrying as the data for Britain.