Service figures indicate cooling economy

Growth in British services companies slowed more than expected last month as hiring eased to its slowest pace since March 2014, suggesting the economic recovery weakened as it entered the second half of this year.

The Star Inn The City, York. Picture by Gerard Binks.

The Markit/CIPS services purchasing managers’ index (PMI) fell to 57.4 in July from 58.5 in June.

Taken together with manufacturing and construction surveys earlier this week, the PMI pointed to economic growth of around 0.6 per cent per quarter, slightly slower than the 0.7 per cent officially reported for the three months to June.

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The findings will give Bank of England policymakers plenty to chew over as they prepare for a large number of statements about the economic outlook and interest rates.

Bank of England Governor Mark Carney said last month it would take sustained growth of more than 0.6 per cent per quarter to take up any remaining slack in the economy, a key factor behind any increase in interest rates.

And survey compiler Markit suggested the upturn was relying on financial services companies, which in July enjoyed their best month since 2013. By contrast, business services like architects and accountants suffered their weakest growth in almost three years.

“A deterioration in service sector growth is the latest in a stream of signals that the economy has slowed as we move into the second half of the year,” said Chris Williamson, chief economist at Markit.

While the slowdown will probably not deter hawks on the Monetary Policy Committee from voting for higher interest rates this week, Mr Williamson said the signs of cooling in the economy would dissuade the majority from doing so for now.

The services employment index sank to a 16-month low in July, adding to tentative signs the labour market has started to moderate following a strong two-year run.

However, new business flowed in at its fastest rate in three months, after falling to a six-month low in June. The all-sector PMI, a composite of the services, manufacturing and construction surveys, fell to 56.7 in July, its lowest since December 2014, from 57.4 in June.

Howard Archer, the chief UK and European Economist at IHS Global Insight, said: “This is a still pretty decent report that points to solid services sector expansion in July. While down from June, the headline business activity index still indicates healthy growth. Furthermore, stronger new business growth in July and increased backlogs of work should support services activity in the near term at least. Employment growth weakened to a 16-month low. While this may have been influenced by slightly slower services expansion and lower confidence, it may also be a sign service companies are trying to lift their productivity as it becomes harder in some sectors to find skilled workers and earnings growth rises.

“With the purchasing managers also reporting modestly slower construction expansion in July and still lacklustre manufacturing activity, the UK economy looks like it might have started off the third quarter on a slightly softer note. Nevertheless, we still expect growth in the third quarter to come in around the 0.7 per cent quarter-on-quarter rate seen in the second quarter, especially as the renewed falling back in oil prices will help matters.”