Slowdown in services casts shadow over recovery

Chris Williamson, chief economist at survey compiler Markit. Picture: Contributed
Chris Williamson, chief economist at survey compiler Markit. Picture: Contributed
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Hopes of a pick-up in the economy over the summer have been dealt a blow after Britain’s dominant services sector suffered its sharpest slowdown in growth for nearly four years.

Economists said the economic recovery now looked fragile though the less-than-sunny performance from a sector that accounts for three-quarters of UK output all but rules out a rise in interest rates this year.

Bank of England policymakers were meeting today for their latest rate-setting meeting, where they will weigh up a raft of economic data including the recent dip into deflationary territory.

The closely-watched Markit/Cips purchasing managers’ index (PMI) for the services sector – published yesterday – slipped back to 56.5 last month, still comfortably above the 50 mark that separates growth from contraction, but down sharply from 59.5 in April. It marks the steepest decline since August 2011.

Recent official figures confirmed that UK gross domestic product (GDP) growth slowed to 0.3 per cent in the first quarter of 2015 – half the rate seen in the final three months of last year.

Chris Williamson, chief economist at survey compiler Markit, said: “Recent weakness in manufacturing and construction has spread to services.”

He said overall growth from across all three sectors was the lowest since December and the second-weakest for two years. Combined output figures pointed to 0.5 per cent expansion for GDP in the second quarter.

Williamson added: “The surveys point to GDP growing at a quarterly rate of just 0.4 per cent 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.”

The services survey found that although growth had softened, it was still strong, while firms reported lower uncertainty following the general election result. Jobs in the sector continued to grow, though at the weakest pace in five months.

A survey from the manufacturing sector earlier this week showed a slight improvement in May though growth remained lacklustre while construction figures revealed a bounce-back from a 22-month low in April.

But the sizes of these sectors are dwarfed by services.

Vicky Redwood, chief UK economist at Capital Economics, said the latest figures showed “that the economic recovery still looks a bit fragile, but the big picture is that growth in the sector remains pretty healthy”.

Howard Archer of forecasting consultancy IHS Global Insight said the overall weaker PMI data from services, manufacturing and construction “leaves little doubt that the Bank of England will be keeping interest rates down at 0.5 per cent” at the end of its latest meeting. The surveys will also fuel belief that the Bank of England will not be lifting interest rates before 2016,” he added.

In its quarterly inflation report last month, the central bank broadly indicated that it was likely to hike the cost of borrowing in the middle of 2016.

But “hawks” on the nine-member monetary policy committee (MPC) argue that the question of whether to raise rates now or leave them on hold is “finely balanced”.

Two members voted for a hike for a number of months at the end of last year but, since then, sinking inflation has seen a return to all nine members agreeing to leave rates as they are.

The Bank will also want to avoid knocking the recovery off course amid signs that it is already slowing down.

Britain’s growth forecast was yesterday cut by the Organisation for Economic Co-operation and Development (OECD) to 2.4 per cent this year, down from its previous forecast of 2.6 per cent in March. This still leaves the UK growing faster than any other major advanced economy.