Key services sector delivers '˜hammer' blow to economy

Britain's key services industry limped to its weakest growth in nearly three years last month, strongly suggesting that the Bank of England will postpone any interest rate rise for some time.

The key services sector grew at its slowest rate for almost three years. Picture: Phil Wilkinson

Business confidence in the outlook for the sector was also lacklustre, with worries ranging from faltering demand to the Brexit referendum and financial market volatility, said the CIPS/Markit purchasing managers’ index report yesterday.

Chris Williamson, chief economist at Markit, which compiles the survey for the Chartered Institute of Procurement & Supply, said: “Despite rising slightly from January’s three-year low, business confidence in the service sector remained at a level which has historically presaged an imminent slowing in the economy to near stagnation or worse in coming months.”

Markit’s services business activity index fell to 52.7 in February from 55.6 in January – where any figure above 50 denotes growth. It was also below its long-run trend level since 1996 of 55.2, in a sector that ranges from retail, financial services and IT to hotels, transport, pubs and restaurants.

“The extent of the slowdown will be a shock to policymakers and surely puts to bed any talk of the Bank of England raising interest rates,” Williamson said.

Yesterday’s data jolted City economists, particularly as it was a culmination of a triple blow to the economy last month, with output growth hitting a ten-month low in construction and a seven-month low in manufacturing.

Construction is seen as being hit by a housing market slowdown, and manufacturing by squeezed exports as the euro zone – taking 40 per cent of UK exports – makes only a subdued recovery.

Markit said the general slowdown in February could see Britain’s economic growth weakening to just 0.3 per cent in the first quarter of 2016.

Howard Archer, chief UK economist at IHS Global Insight, said that services’ business activity and new work expanding at the slowest rate since March 2013 was a “hammer blow” to the economy.

“February’s reported slowdown in services expansion is all the more serious as the UK has recently been particularly reliant on the sector for growth,” Archer said.

He added that the there seemed little likelihood “of a near-term pick-up”, given incoming new services business growth hit a 15-month low in February, while employment growth was the lowest since August 2013.

Markit said that less than half of survey respondents forecast growth at their businesses over the next 12 months, although only 8 per cent expect a decline in business. Many City economists at this time last year forecast a rise in interest rates from historical lows by last autumn. In the past two months many have changed that prediction to early 2017.