Services sector growth slows to 27-month low

Growth slowed in UK services sector
Growth slowed in UK services sector
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BRITAIN’S growth prospects have received a body blow after the powerhouse services sector expanded at its weakest pace for more than two years last month.

Economists said yesterday that overall output in the current third quarter was likely to rise by just 0.5 per cent, down from the 0.7 per cent recorded in the three months to June.

The latest Markit/Cips purchasing managers’ index (PMI) for the services sector, which accounts for more than two-thirds of the UK economy, showed a reading of 55.6 for August – above the 50 level that indicates growth, but down on July’s result of 57.4. It marks the worst performance since May 2013, driven by a sharp slowdown in new business.

Markit chief economist Chris Williamson said the services data, which does not encompass the retail sector, combined with PMI snapshots for the construction and manufacturing sectors over the past few days, pointed to weaker growth overall in the economy in the three months to September.

He said signs of easing growth in the wider economy, together with waning price pressures for firms, renewed expectations that interest rates will remain on hold until the “global economic picture becomes clearer”.

The survey came as the International Monetary Fund (IMF) cautioned that China’s slowdown, volatile financial markets and tumbling raw material prices have raised the risks to global economic growth. Its warning comes ahead of a meeting of G20 finance ministers and central bankers in Turkey today and tomorrow.

The pound briefly took a hit after the worse-than-expected services sector data, falling almost a cent to just under $1.53 and a cent lower to €1.36. Figures earlier this week showed a drop in the PMI reading for the manufacturing sector as exports fell for the fifth month in a row, blamed on the strength of the pound, weak sales in the eurozone and the slowdown in China.

Housebuilding helped drive a steady performance from the construction sector, although it was still lower than forecast.

Howard Archer, chief UK and European economist at IHS Global Insight, the forecasting consultancy, said: “The overall weaker set of August purchasing managers’ surveys for services, manufacturing and construction will likely fuel belief that the Bank of England will not be raising interest rates until well into 2016.”

The disappointing services figures came after the slowest increase in new business across the sector since April 2013.

Employment continued to rise in August and picked up pace from July’s recent low, but firms increased staffing at the second-weakest pace since March 2014.

Cost pressures for services sector firms also eased for the third month running in August as the rate of inflation hit its weakest since January, thanks largely to falling fuel prices.

Despite this, services businesses increased the prices they charge customers, but only fractionally, according to the survey.

Analysts at Barclays Research noted: “The downward surprise in [the] PMI release points to continued moderation and underscores our more cautious macro view that economic activity is to abate over the coming months, with GDP growth easing to around 0.5 per cent, quarter-on-quarter, in Q3 and Q4.”

China’s cooling economy has led to sharp falls in share prices in recent weeks and triggered broader concerns about world growth.