UPDATE 1-UK April services growth slows, prices rise - PMI

Thu May 5, 2011 10:24am BST

Quotes

   

* April services PMI falls more than expected; pound slides

* Prices charged index highest since September 2008

* PMI surveys point to 0.4 pct quarterly UK growth -Markit

* Weak start in Q2 reinforces views that BoE will hold rates

* Reuters Insider show: link.reuters.com/xux39r

(Adds quotes, market reaction, Morrison results)

By Peter Griffiths

LONDON, May 5 (Reuters) - Britain's dominant service sector slowed more than expected in April, suggesting the UK economy failed to pick up speed after its sluggish start to the year and giving the Bank of England more reason to keep rates on hold.

The Markit/CIPS headline services PMI index eased to 54.3 in April from 57.1 in March, staying in positive territory for a fourth straight month, but undershooting the 55.7 forecast.

The survey, taken with downbeat manufacturing and construction PMIs earlier this week, suggest GDP growth is running at a quarterly rate of just 0.4 percent, Markit's chief economist Chris Williamson said.

That is lower than the 0.5 percent first quarter growth rate seen after a shock contraction late in 2010. [ID:nLDE73Q0SJ]

"At the start of the second quarter, the economy appears to have lost momentum," said Peter Dixon, an economist at Commerzbank. "In terms of what it means for policy, a rate hike before the summer would appear to be out of the question."

The BoE will publish its interest rate decision at 1100 GMT and the Bank is widely expected to keep rates at the current record low of 0.5 percent. Markets have pushed back expectations and price in a full 25 basis point increase only in early 2012.

Sterling hit a 13-month low versus the euro after the survey [ID:nWEA8834], but analysts stressed that the services sector was still growing, despite easing back from March's spike.

PMI surveys this week showed manufacturing grew at its slowest pace in 7 months in April [ID:nLDE7420Z5] and construction eased after two strong months. [ID:nLAK002775]

Signs of slowing growth could be worrying for Britain's coalition government, which has staked its reputation on eliminating a budget deficit, running at 10 percent of GDP, by the time of the next election in 2015.

On Thursday, the coalition faces its biggest test since it was formed a year ago when voters go to the polls for local elections and take part in a rare referendum on electoral reform. [ID:nSUPERTH01]

TWIN DANGERS

Excluding December's snow-related drop, the services PMI headline index for April saw its largest decline since October 2008 and was blamed mainly on UK government spending cuts.

The services sector saw average prices charged rise in April, with the index jumping to 53.8 from 52.2 in March, its strongest reading since September 2008.

The figures underline the twin dangers of sluggish growth and high inflation facing the BoE. It has so far resisted pressure to raise rates in order to try to curb inflation running at double its 2 percent target, opting to wait for signs of a more robust recovery.

Against a backdrop of mainly gloomy news for British retailers, there was one positive note on Thursday. Supermarket chain Wm Morrison (MRW.L) said it beat first-quarter sales forecasts. [nLDE743285]

The breakdown of the Markit/CIPS PMI survey gave a mixed picture for the service sector at a time of weak consumer confidence, government cuts and worries about the outlook.

New business grew at its fastest pace since March 2010 and the rise in input prices eased to its lowest in four months.

However, the business expectations index -- which measures the outlook for a year's time -- eased for a second consecutive month in April to reach its lowest since December. Firms gave government cuts and weaker public sector demand as the reason for their less optimistic outlook.

"The service sector suffered a sharp loss of growth momentum at the start of the second quarter," Markit's Williamson said. "The deterioration in the sector's performance can be largely linked to government spending cuts." (Editing by Stephen Nisbet and Toby Chopra)