May services PMI shows growth at 3-month low

LONDON Fri Jun 3, 2011 4:57pm BST

A woman prepares food in a restaurant, in central London January 18, 2011. REUTERS/Stefan Wermuth

A woman prepares food in a restaurant, in central London January 18, 2011.

Credit: Reuters/Stefan Wermuth

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LONDON (Reuters) - The service sector grew at its slowest pace for three months in May, as public holidays held back activity, stoking worries that the economy's sluggish start to the year has persisted into the second quarter. The Market/CIPS headline services PMI index eased to 53.8 last month from 54.3 in April, the lowest reading since February and below the 54.1 consensus forecast.

The slowdown was blamed on weak consumer spending and four public holidays that fell during the mid-April to mid-May period covered by the poll.

"Given the dominant role of the services sector, the survey fuels concerns over the fragility of the economy and its ability to withstand the fiscal tightening," said Howard Archer, chief UK economist at IHS Global Insight.

"The survey reinforces the case for the Bank of England to keep interest rates down at 0.5 percent, not only at the end of its June policy meeting next Thursday but also for several months to come."

Market senior economist Paul Smith said the services PMI index and a surprisingly weak manufacturing survey this week pointed to a soft second quarter GDP reading.

"Although in part attributable to the extra bank holidays in late April, the sector has lost some underlying momentum," Smith said. "May's survey suggested that the weakness of household consumption remains a drag."

Wednesday's manufacturing survey showed activity grew at its slowest pace in 20 months in May, while a PMI poll on Thursday said the construction sector grew slightly faster than expected.

Growth in the euro zone's services economy also slowed a little in May as business confidence dipped, though by less than first thought.

Separate figures on Friday showed the volume of new British construction orders fell by 23 percent on the quarter in the first three months of 2011, the biggest decline since 1987.

SLUGGISH GROWTH

Britain's economy grew by a mediocre 0.5 percent in the first quarter to cancel out a fall of the same size late in 2010, leaving output stagnant over the two quarters.

Worries about economic growth have prompted markets to push back their bets on the timing of the first interest rate rise to early next year.

Despite rates standing at a record low of 0.5 percent since March 2009, households are still feeling the pinch.

Low wage growth, higher prices and tax rises have eroded real incomes, while public cuts and expectations house prices will drift lower this year have added to the gloomy outlook.

"We know the Bank of England is becoming increasingly concerned about the weakness of the consumer sector, and the doves seem to be in the ascendancy," said Hetal Mehta, economist at Daiwa Capital Markets Europe. "The services PMI survey will only serve to embolden the doves."

The services PMI survey highlighted a broad-based slowdown in activity across the sector, with smaller and medium-sized companies faring worse than big firms.

The new business index saw growth ease to 55.1 in May from 56.3 in April, the lowest reading since February, although companies reported signs of improved private sector demand.

Companies raised prices for an eighth consecutive month, but the index eased from its two-and-a-half year peak in April. Input prices growth also slowed. That may provide a crumb of comfort for the Bank of England, whose task is to bring inflation running at 4.5 percent back to its 2 percent target.

The number of companies that expect activity to rise in a year's time reached a three-month high, with firms talking of strong pipelines of work and more inquiries from customers.

(Editing by Toby Chopra)

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