March 3, 2011 / 9:34 AM / 9 years ago

Services PMI growth slows in February

LONDON (Reuters) - Growth in the dominant service sector slowed sharply in February after January’s weather-related bounce and companies recorded job losses for the fifth month running, a survey showed on Thursday.

Office workers are seen in the London Place business district near Tower Bridge in central London February 9, 2011. REUTERS/Toby Melville

February’s headline services PMI index fell to 52.6 from January’s eight-month high of 54.5, a peak that followed a negative reading in December blamed on snow. The index, compiled by Markit/CIPS, had been expected to fall to 53.5.

Although the pace of growth eased in February, it remained close to the average for the second half of 2010 and will reinforce expectations the economy will recover early this year, but only slowly.

The surprise 0.6 percent contraction in the fourth quarter of last year has made the Bank of England wary of raising interest rates, despite a surge in inflation to double the central bank’s target.

Investors are betting the Bank will raise interest rates from their low of 0.5 percent by the middle of the year, although much will depend on how the economic data develops.

“February saw growth of the UK service sector return to the modest rate seen prior to the weather-related readings of December and January, leaving it on course to expand by around 0.3 percent in Q1,” said Paul Smith, senior economist at Markit.

HEADWINDS

Thursday’s weaker-than-expected survey contrasts with surprisingly strong data for manufacturing and construction earlier this week.

A manufacturing PMI survey on Tuesday showed growth held at a record high in February, while figures on Wednesday showed construction activity grew at its fastest pace in 8 months.

“Even with strength in manufacturing and the upside surprise to February construction data, the economy looks likely to deliver a rate of expansion that only offsets the decline in Q4 2010 to leave the underlying trend in GDP flattish,” Smith said.

The services sector, which accounts for around three-quarters of the economy, faces headwinds this year from public spending cuts, tax rises and lower consumer spending.

Thursday’s survey did contain some positive signals, however. Businesses were more upbeat about the future year’s prospects than at any time since June and, excluding January’s spike, the new business reading for February was the strongest in nine months.

The rate of input price inflation eased slightly from January’s near two-and-a-half year high, although it was still above the average for the last two years.

Average prices charged rose for a fifth consecutive month as service sector companies sought to rebuild margins to offset higher input price costs and January’s VAT sales tax rise.

The Bank of England is trying to reverse a surge in inflation, while protecting the fragile economic recovery.

Its Governor Mervyn King told a parliamentary committee on Tuesday the recovery would be choppy, although he pointed to more positive surveys at the start of the year.

Editing by Toby Chopra.

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