June 3, 2015 / 8:35 AM / 3 years ago

UK services growth stumbles in May, points to slower recovery

LONDON (Reuters) - Growth in Britain’s service sector suffered its steepest slowdown in nearly four years in May, according to a survey that suggested the economy might not recover as quickly as hoped after stumbling in early 2015.

Visitors admire St.Paul's Cathedral from the restaurant floor of the Tate Modern gallery in London March 15, 2007. REUTERS/Alessia Pierdomenico

Sterling fell sharply after Wednesday’s Markit/CIPS services purchasing managers’ index (PMI) fell back to 56.5 last month, still comfortably in growth territory but down from 59.5 in April and at its lowest level since December.

The monthly drop was the biggest since August 2011 and the reading undercut the lowest forecast in a Reuters poll of economists, though the index did show signs that rock-bottom inflation could pick up.

Along with a weak manufacturing figure and a bounce in construction, combined growth across the three sectors in May was the slowest since December and the second-weakest for two years, Markit said.

Data from mortgage lender Nationwide earlier on Wednesday showed the annual rate of house price growth fell to its lowest in nearly two years.

Economists said Britain’s economy looked like it would pick up a bit of pace from unexpectedly weak expansion of 0.3 percent in the first three months of 2015, but that growth would probably be slower than in 2014.

“Overall, the PMI surveys continue to point to solid growth, strong employment and soft productivity,” Dominic Bryant, an economist at BNP Paribas, said. “Continued low productivity growth combined with the pick-up seen in wages means that inflation pressures are gradually beginning to build.”

Chris Williamson, Markit’s chief economist, said the weakness would be a concern for the Bank of England which is considering when to raise interest rates from a record low of

0.5 percent, where they have sat since the financial crisis.

Williamson said the data pointed to growth of 0.4 percent in the three months to May, while some economists said growth for the second quarter might be slightly higher.

At the same time, the index showed input prices increased at the fastest rate in eight months and prices charged by service providers rose after their sharpest fall in over three years in April.

“Rate hikes later this year should not be ruled out,” Williamson said.

He said some of the slowdown could turn out to have been caused by uncertainty about the outcome of Britain’s national election held on May 7.

The unexpectedly decisive victory of Prime Minister David Cameron’s Conservative Party translated into stronger sentiment about the future among services firms although growth

in employment was its slowest in five months, Markit said.

Additional reporting by David Milliken; editing by John Stonestreet

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