Slowdown in services fails to dent recovery hopes

Many predict Mark Carney will use next weeks report to signal a change in strategy. Picture: GettyMany predict Mark Carney will use next weeks report to signal a change in strategy. Picture: Getty
Many predict Mark Carney will use next weeks report to signal a change in strategy. Picture: Getty
Growth in the UK’s dominant services sector slowed last month as the record rainfall dampened demand, but the continued rise in activity underpins hopes that the economic recovery remains on track.

Economists said the easing for the sector, which accounts for more than three-quarters of the UK economy, would also reinforce the prospect of borrowing costs remaining at a record low for the rest of the year.

The Bank of England’s monetary policy committee (MPC) is expected to leave interest rates on hold at the end of today’s meeting. Unemployment is at 7.1 per cent, just above the level at which the Bank would consider a rise in rates, but many observers expect governor Mark Carney, below, will use next week’s inflation report to signal a change in his “forward guidance” strategy, possibly lowering the jobless threshold to 6.5 per cent.

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The UK economy expanded by 0.7 per cent in the final quarter of 2013. Growth looks set to accelerate to 0.8 per cent in the first three months of this year, according to Chris Williamson, chief economist at Markit, which compiles the services purchasing managers’ index (PMI).

The headline business activity index fell to 58.3 last month, down from 58.8 in December and below consensus forecasts of 59. Although the reading was the lowest for seven months, Williamson said the figure remained “comfortably above its long-run trend”.

Recruitment across the services arena, which encompasses a broad range of activities such as financial services, transport and hospitality, accelerated last month as business optimism reached its highest level in almost four years. Howard Archer, chief UK economist at IHS Global Insight, said the increased hiring could see unemployment fall to 7 per cent “imminently”, putting more pressure on the Bank of England to lift borrowing costs.

But he added: “The slight slowing in growth in January implied by the PMI reinforces our belief that the Bank will not only keep interest rates at 0.5 per cent at the end of the MPC’s February meeting on Thursday, but also all through 2014 and very possibly well into 2015.”

Sister PMI surveys this week showed the recovery was being supported by other sectors, with construction activity growing at its fastest pace in more than six years and manufacturing growth remaining firm, despite easing in January.

Williamson said the survey findings bode well for the economic recovery, and some firms were able to pass on rising costs, such as higher wage and utility bills, to their customers in the form of price increases.

He added: “The service sector saw another month of strong growth in January, suggesting that the UK economy continues to recover at a rapid pace.

“With business optimism about the future reaching the highest for almost four years, we should see growth revive again in February, hopefully as the weather improves and households and businesses dry out from January’s rainfall.”