By Daniel Hunter

The UK service sector continued to grow during June, albeit at a slower rate as the additional holidays around the Jubilee and reports of a fragile underlying demand environment weighed on activity and new business wins.

Highlighting growing concerns about the UK macroeconomic outlook, business sentiment in the sector fell markedly to hit a six-month low.

After accounting for usual seasonal factors, the headline Business Activity Index recorded 51.3. That was down from 53.3 in May and the lowest reading since last October. Growth has now been sustained for 18 months, but has recently seen a deceleration with the average index level for Q2 well down on that recorded for the opening quarter of the year.

Weaker activity growth in June stemmed in the main from a similar slowdown for new business. Latest data showed that sales rose again in June, but at the weakest rate in the current 18-month period of expansion.

Temporary factors played some part, with anecdotal evidence suggesting that the net effect of the Jubilee holidays was to reduce market activity. This was offset to some degree by reports of an increase in work ahead of the Olympics, but there was nonetheless a suggestion that business confidence was generally lower in June. The European sovereign debt crisis was reportedly a factor weighing on sentiment, creating an air of uncertainty that led to business plans being put on hold.

“The Jubilee weekend clearly led to a temporary slowdown in activity across the services sector as whole. However, this one-off event does not disguise the fundamental uncertainties affecting the sector and the wider economy," David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply.

“The Eurozone continues to be the biggest drag on business confidence, along with a scarcity of big contracts, and the prospect of a post-Olympics slump in business. Meanwhile, margins continue to be under intense pressure, caught between increasingly competitive pricing and increasing costs. Businesses will need to innovate to counteract these challenges, particularly if they are to remain profitable in these difficult times.”

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