Services sector slows down sharply

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Published: Wednesday 3rd June 2015 by The News Editor

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Britain’s dominant services sector suffered its sharpest slowdown in growth for nearly four years in May, adding to doubts that the wider economy will bounce back from a disappointing start to the year.

The sector posted a reading of 56.5 on the closely-watched CIPS/Markit purchasing managers’ index (PMI) survey, in which 50 separates growth from contraction. The reading was the lowest since December.

It was down sharply from 59.5 in April – the steepest decline since August 2011.

The disappointing data sent sterling falling by a cent against the US dollar.

The services sector makes up more than three-quarters of UK output and has led the economy out of its downturn while others remain stuck below pre-recession levels.

Chris Williamson, chief economist at survey compilers Markit, said: “Recent weakness in manufacturing and construction has spread to services.”

He said overall growth from across all three sectors was the lowest since December and the second-weakest for two years. Combined output figures pointed to 0.5% expansion for gross domestic product (GDP) in the second quarter.

It comes after recent official figures confirmed that GDP growth slowed to 0.3% in the first quarter of 2015.

Mr Williamson said: “The surveys point to GDP growing at a quarterly rate of just 0.4% in May, raising doubts about the ability of the economy to rebound convincingly from the weakness seen at the start of the year.

“The lacklustre growth picture will be a concern to policymakers and effectively kills off the chances of any imminent hiking of interest rates by the Bank of England.”

But Mr Williamson added that there were signs that the disappointing rate of expansion was only temporary and that rate hikes this year should not be ruled out.

The services survey found that though growth had softened, it was still strong, while firms reported lower uncertainty following the general election result.

Jobs in the sector continued to grow, though at the weakest pace in five months.

A survey from the manufacturing sector earlier this week showed a slight improvement in May though growth remained lacklustre while construction figures revealed a bounce-back from a 22-month low in April.

But the sizes of these sectors are dwarfed by services.

Vicky Redwood, chief UK economist at Capital Economics, said the latest figures showed “that the economic recovery still looks a bit fragile, but the big picture is that growth in the sector remains pretty healthy”.

Howard Archer of IHS Global Insight said the overall weaker PMI data from services, manufacturing and construction “leaves little doubt that the Bank of England will be keeping interest rates down at 0.5%” at the end of its latest meeting tomorrow.

He said: “The surveys will also fuel belief that the Bank of England will not be lifting interest rates before 2016.”

Published: Wednesday 3rd June 2015 by The News Editor

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