Services growth fails to dent expectations of QE injection

Published on Thursday 6 October 2011 01:50

Britain’s key service sector posted a surprise improvement yesterday but the markets remain on alert as Bank of England policymakers decide today on whether to inject more money into the fragile economy.

The closely-monitored Markit/Cips purchasing managers’ index (PMI) for the crucial service sector – representing three-quarters of the economy – rose in September, but against a backdrop of a weakening outlook.

Revised second-quarter GDP data showed growth was far lower than previously thought as consumer spending slumped. The UK economy grew by just 0.1 per cent between April and June, compared with the earlier estimate of 0.2 per cent, while the first quarter was downgraded to 0.4 from 0.5 per cent.

Markit said its services PMI rose to 52.9 in September from 51.1 in August, bouncing back from its biggest one-month fall in a decade and moving away from the 50 line that separates growth from contraction.

The result, coupled with robust PMI data for the manufacturing sector earlier this week, will have dampened speculation that the Bank of England may launch a fresh round of quantitative easing at its monthly meeting. However, economists said there was still a case for printing more money, while the European Central Bank is also being watched for any cut in interest rates.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said: “Services growth remains well below past norms and the fact that confidence among services companies sank to a 30-month low in September highlights the worrying domestic and global situation facing the UK economy.

“Further quantitative easing by the Bank of England remains highly probable – and sooner rather than later.”

Marchel Alexandrovich from Jefferies International added: “I doubt it [the services PMI] changes the underlying perceptions of where the UK economy is heading – a decent month, yes, but overall I think it probably doesn’t change the idea that the Bank of England will probably do more QE in either November or December. It is pretty anaemic growth.”

The London stock market brushed aside the revised GDP numbers from the Office for National Statistics and the weaker outlook with the FTSE 100 index closing up more than 3 per cent at 5,102.17 – more than erasing Tuesday’s losses.

Investors took comfort in European finance ministers agreeing to recapitalise eurozone banks and a better-than-expected report on the United States’ service sector.

The upturn in UK service sector activity in September was driven by new orders and stronger demand. However, business confidence fell to its lowest since March 2009 due to concerns over financial turbulence and public and private investment and is now running at levels “only ever seen before in periods of crisis”, Markit chief economist Chris Williamson said.

“The rise in the PMI index in September… may persuade the Bank of England to hold off before implementing any further stimulus at its October meeting,” Williamson noted. “But the case is not clear-cut, as forward- looking indicators from the PMI survey suggest that we may see further softness in the final quarter of the year.”

David Noble, chief executive at Cips, added that the figures were “a small ray of sunshine” but the sector is still on a weak footing.

Input costs rose over the month due to higher energy, fuel and supplier prices, while backlogs of work outstanding fell further with levels of employment broadly unchanged.

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