June 3, 2010 / 8:32 AM / 10 years ago

Slower new business takes shine off services PMI

LONDON (Reuters) - Growth in the services sector held broadly steady in May, a survey showed on Thursday, but worries about an impending public spending squeeze led to a drop in hiring and a sharp slowdown in new business.

The Markit/CIPS services PMI headline activity index nudged up to 55.4 in May after a surprise drop to 55.3 in April when disruption from Iceland’s volcanic ash cloud pushed growth to its lowest since January.

The services index has now been above the 50 mark which separates growth from contraction for more than a year, but the consensus forecast had been for a slightly more convincing rebound to 55.5.

“There were reports the general election outcome and worries over the strength of the economic recovery had resulted in a degree of client uncertainty and the deferral of spending,” the survey noted.

The survey was compiled from data gathered after the formation of Britain’s new coalition government between the Conservative and Liberal Democrat parties following a May 6 election. The survey covered everything from cafes to banks and IT services.

The new business index fell almost two full points to 52.8, its lowest level since August 2009. The index has slowed each month since February when it hit a more than two-year peak of 57.5.

Thursday’s survey, which also showed the first fall in the employment index since September, is the latest to highlight risks to Britain’s recovery.

Figures from GfK/NOP showed consumer confidence fell for a third consecutive month in May and a survey by the Confederation of British Industry showed most service sector firms expected business and profitability to slow over the coming three months.

The PMI survey showed input price inflation fell slightly from April’s 19-month peak but cost pressures remained evident, with firms citing higher energy, fuel and supplier prices.

“The devil was in the detail, with weaker trends in new business and employment raising questions over the sector’s ability to maintain its current level of growth in the second-half of the year,” said Paul Smith, senior economist at Markit.

Editing by Stephen Nisbet

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