Service sector figures knock recovery hopes

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GROWTH in the UK’s powerhouse services sector slowed to a near two-year low last month, according to a new survey, fuelling concerns about the health of the economy.

The Markit/CIPS purchasing managers’ index (PMI) for services activity, in which a reading above 50 represents growth, came in at 50.6 in September, down from 52.2 the previous month.

The slowdown was driven by weaker new orders, meaning that incoming new business was insufficient to compensate for the completion of existing projects.

The Bank of England’s decision this week to increase or hold quantitative easing will be a close call as the strong GDP data showing 1 per cent growth in the third quarter is offset by the weak services report, as well as poor manufacturing and construction surveys.

Andrew Harker, economist at survey compilers Markit, said: “The latest UK services PMI data provide a warning to those who saw the strong growth in GDP during the third quarter as symbolising the start of a strong and speedy economic recovery.”

Mark Goldstone, head of business representation and policy at Leeds, York & North Yorkshire Chamber of Commerce, said: “We shouldn’t be overly surprised by the latest numbers from the PMI, the Chamber has reported in its own surveys that the economy remains challenging. However, business owners generally tend to take a longer term view and we are seeing signs from our members that investment intentions are starting to improve in the region as they look to the future.”

The services sector, which makes up around 75 per cent of the total economy, was the driving force behind the better-than-expected growth in the third quarter, as it rose 1.3 per cent, following a 0.1 per cent drop in the previous quarter.

Despite the strong headline growth, economists warned the underlying picture was much weaker, as one-off factors such as the Olympics distorted the performance.

Evidence of the underlying picture started to emerge last week as purchasing manager surveys revealed a drop in manufacturing and construction output in October.

In the services report, those respondents that did record an increase in business activity cited improving underlying demand and client confidence.

However, other panellists reported that these improvements remained only tentative, while strong competitive pressures remained.

Service businesses reduced employment in October for the second month in a row, although the rate of job cuts was weaker than in the previous month. There was more pressure on the inflation front as input costs remained solid and rose broadly in line with the rate in the previous two months.

A rise in the national minimum wage had reportedly contributed to higher average staff costs, while energy, food and fuel prices were also signalled as having increased during October.

Before the services report, most economists had expected the Bank’s Monetary Policy Committee (MPC) to hold off from any further economy-boosting moves when they gather this week.

Nida Ali, economic adviser to the Ernst & Young ITEM Club, said: “The latest round of QE comes to an end in November, making this month’s policy decision pretty crucial.

“Even though recent speeches by MPC members have been against authorising more QE, disappointing results for October’s PMI surveys could mean the vote for further asset purchases this month could be a close one.”