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UK Services Sector Grows Modestly Despite Falling New Work, Employment

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British services sector expanded at a modest rate in February though new work and employment decreased, survey data from IHS Markit showed on Tuesday.

The IHS Markit/CIPS UK Services Purchasing Managers' Index rose to 51.3 from a two-and-a-half year low of 50.1 in January. Economists had expected to reading to remain unchanged.

A reading above 50 suggests growth in the services sector.

"February data leaves the index on track for its weakest quarter since Q4 2012," IHS Markit said, citing that the average reading has been 50.7 so far in the first quarter of this year.

Services sector growth was dampened mainly by the Brexit-related uncertainty. There were widespread reports that political uncertainty had encouraged delays to corporate spending decisions and a general rise in risk aversion among clients, IHS Markit said.

New work declined for a second consecutive month, but the pace of decrease has eased since the start of the year. The weakness was largely due to the Brexit uncertainty and consequently, some European clients delayed committing to new projects.

Backlogs of work declined for a fifth month in a row, which is the longest stretch since early-2013.

Subsequently, firms became more cautious in staff hiring in February. Employment fell, albeit modestly, at the fastest pace since November 2011 and this was sometimes due to restructuring efforts following the non-replacement of voluntary leavers.

Input prices inflation fell to its weakest level in nine months, but remained sharp due to higher fuel, energy and staff costs. Meanwhile, output price inflation was the slowest since September, thanks to softer cost pressures, intense competition and efforts to boost sales.

Overall private sector activity improved in February from near-stagnation at the start of the year. The UK Composite PMI climbed to 51.4 from 50.3 in January. Economists had expected a lower reading of 50.1.

Both new work and employment fell further in February. Private sector employment shrunk at the fastest pace since September with lower payroll numbers at manufacturing firms and service providers more than offsetting a modest upturn in construction sector workforces.

"The [PMI survey] data suggest the economy is on course to grow by just 0.1 percent in the first quarter," Chris Williamson, Chief Business Economist at IHS Markit, said .

"Worse may be to come when pre-Brexit preparatory activities move into reverse. Many Brexit-related headwinds and uncertainties also look set to linger in coming months even in the case of PM May's deal going through."

Elsewhere on Tuesday, the Bank of England said in a report that the core of the UK financial system, including banks, dealers and insurance companies, is resilient to, and prepared for the plethora of risks including a worst case no-deal and disorderly Brexit.

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