By Jonathan Davies

Growth in the UK's services sector saw a sharp fall in May, according to a closely watched survey.

The Markit/CIPS purchasing managers' index (PMI) fell from 59.5 in April to 56.5 in May. Any figure above 50 indicates growth, and so the sector is still growing at a fast pace, however it is the sharpest fall since August 2011.

Anecdotal evidence from the latest survey linked higher activity to reduced business uncertainty resulting from the general election result. Firms also mentioned an ongoing general upturn in the economy, new products, successful marketing and a strong housing market as having supported growth.

Stronger sentiment following the election was also reported as a factor underpinning firms’ business expectations in May. The 12-month outlook improved slightly since April, and remained strong overall with just over half of all respondents forecasting growth, compared with just 7% predicting declines in activity.

Service providers continued to expand workforces at a marked pace in May, despite a slight easing in the rate of job creation to a five-month low. Input prices increased at the fastest rate in eight months in May, in a further rebound in inflation from January’s five-and-a-half year low. Firms linked greater cost pressures to salaries, fuel and some foodstuffs. Meanwhile, prices charged by service providers rose, having declined at the fastest rate in over three years in April.

Chris Williamson, Chief Economist at Markit,
said: “Recent weakness in manufacturing and construction has spread to services. Overall growth in May across all three sectors was the lowest since December and the second-weakest for two years.

“The surveys point to GDP growing at a quarterly rate of just 0.4% in May, raising doubts about the ability of the economy to rebound convincingly from the weakness seen at the start of the year. The lacklustre growth picture will be a concern to policymakers and effectively kills off the chances of any imminent hiking of interest rates by the Bank of England.

“Rate hikes later this year should not be ruled out: there are signs that the disappointing rate of expansion is only temporary, linked to uncertainty surrounding the general election, and the surveys point to rising inflationary pressures as well as a further tightening of the labour market.”