The service sector has tended to be a consistently good performer even when the rest of the economy is underperforming. Recent figures suggest that the sector might not be delivering its usual positive results.
Has the service sector really lost its sparkle?
What is the service sector?
The economy can be broken down into three sectors. The Primary sector is involved in farming and mining – the provision of raw materials. The secondary sector is concerned with manufacturing and processing, turning those raw materials into products. The tertiary, or service sector covers most of the other kinds of economic activity. All the services involved in the distribution and sale of the products produced further down the chain are logically enough part of the service sector. Shops and businesses such as pubs and hotels and the leisure industry are boosted by banks, healthcare, financial services and the knowledge economy to make up a sector worth up to 80% of the entire UK GDP.
What is happening?
The doomsayers are suggesting that the services sector is a sensitive barometer of the UK economy in general, and that it has hit a decline in recent months.
This is not strictly true. The service industries, along with the rest of the UK economy are growing.
The tabloids may be trumpeting doom and gloom to sell papers, but the fact is that the Markit/CIPS services purchasing managers’ index, which provides monthly figures showing the health or otherwise of the sector indicates the sector continued to show expansion, albeit slow.
On the index, anything below 50 represents a decline in the sector. The September figure was 53.9, and it fell to 52.2 in October, the lowest reading since March, when the UK was swept by the Beast from the East. It was down to just 50.4 in November, the lowest reading since July 2016.
It may not be shrinking, but it looks as though the service sector is currently doing little more than tread water. Clearly, something is affecting the service sector.
What’s causing the slowdown?
The problem seems to have two distinct roots. The first is concern about a global slowdown after the growth of the past few years. The other is of course worries about Brexit.
Reports from Markit/CIPS suggested that subdued business and consumer spending had held back the predicted growth in November, and a number of firms questioned suggested that it was Brexit uncertainty that seemed to be behind delays in clients’ business investment decisions.
It looks as though people and businesses are putting off buying until there is some clarity on Brexit decisions.
There could be another, probably Brexit related problem here. Businesses generally have seen a sharp increase in input prices, due to higher transport costs and rising staff wages – and a weaker pound, which is making exports of all kinds more expensive, and very attractive for the rest of the world.
What does this mean for the future?
Brexit uncertainty is clearly causing a slowdown at present, but there may be some grounds for optimism.
Brexit uncertainty will, hopefully, not last forever. We are due to leave the EU in March, regardless of whether or not a deal is in place, and what form any deal may take.
In the meantime, strong wage and employment data suggest that the EU economy has plenty of energy all set to be unleashed. The need to invest to do business in whatever the conditions are after the Brexit dust settles, the low value of the pound on foreign exchange markets, and low interest rates could all mean exciting opportunities for the service sector.
If you are worried about the current low growth figures and your own financial arrangements, a call to Continuum could help you find the best opportunities.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Past performance is not a guide to future performance, Investments denominated in a currency other than sterling or ones that undertake transactions on foreign markets, which include the financial markets of developing countries (Emerging Markets), may expose investors to greater risks caused by fluctuations in foreign exchange rates.
The value of investments can fall as well as rise and you may get back less than you invested.
dailymail.co.uk – Economic gloom deepens as services sector slows and business confidence hits lowest level in a decade – 5th November2018
markiteconomics.com – Service sector growth eases to 28-month low in November – 5th December 2018
ons.gov.uk – five facts about the uk service sector – 2nd September 2016