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UK services PMI suffers biggest drop in a decade

Activity in the dominant services sector slowed at the fastest pace in a more than a decade last month, and firms’ confidence in future business weakened to a one-year low, adding to evidence of a stalling economic recovery.

The Markit/CIPS services purchasing managers’ index (PMI) fell to 51.1 in August from 55.4 in July. This was the second-biggest fall on record, and confounded forecasts for a gentler drop to 54.0, although the index stayed above the 50-mark that divides growth from contraction.

The only time there was a bigger one-month fall in the index was during the foot-and-mouth disease crisis in April 2001, which hammered the agricultural sector and hurt tourism.

Companies cited economic uncertainty and slower growth in new business as the main reasons for weaker business expansion last month. Survey compilers Markit said that riots across England in early August played only a subsidiary role in depressing activity.

“There can be little doubt that the underlying growth profile of the sector has weakened in recent months,” said Paul Smith, senior economist at Markit. “Allied with soft manufacturing data and a slowdown in construction growth, the overall picture provided by the latest PMI surveys is one of a stuttering UK private sector.”

The figures are likely to confirm expectations that the Bank of England will leave interest rates at 0.5 percent this week and may even ignite speculation the central bank will consider injecting more stimulus into the economy.

Last week, PMI surveys suggested that UK manufacturing was contracting at its fastest pace in more than two years, while construction activity grew at its slowest rate so far this year.

Companies’ input costs continued to surge, although at a slightly slower rate, but the prices they charged barely rose, suggesting demand was not strong enough to allow them to pass rising costs onto customers.

Businesses’ expectations for the future were the weakest in a year, with the relevant sub-index sliding to 65.1 from 67.3 in July. Around 44 percent of respondents forecast a rise in activity from current levels in a year’ time, with some expecting to benefit from the London 2012 Olympics, while about 13 percent predicted a decline.

The shaky economic climate and worries over the impact of government spending cuts were said to weigh on sentiment.

Employment in the services sector continued to fall, with the corresponding index recording the lowest reading since January, as backlogs of work declined.

Despite the subdued data, services still outperformed the manufacturing sector, which shrank at its fastest pace in more than two years in August, hurt by a sharp drop in demand for exports, another Markit/CIPS survey showed last week.

The services survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT and hotels and restaurants, but excludes retail.

Source: Reuters