February 4, 2009 / 9:35 AM / 11 years ago

Pace of services contraction eases in January

LONDON (Reuters) - Britain’s services sector shrank less than expected last month, a survey showed on Wednesday, but firms slashed jobs at a record pace, leaving investors convinced that interest rates would be cut again this week.

A hotel restaurant waiter is sen in a publicity photo. REUTERS/Vismedia

The Chartered Institute of Purchasing and Supply/Markit purchasing managers’ index picked up to 42.5 last month from 40.2 in December. That was well above forecast and the highest reading since September, the month Lehman Brothers filed for bankruptcy protection.

The figures tally with manufacturing and construction indicators earlier this week, and suggest that while the economy may have passed through the sharpest phase of the credit crunch, the spiral of job cuts and falling demand may have further to run.

“It looks like the headlong plunge we saw in the wake of the Lehman collapse is starting to bottom out,” said Brian Hilliard at Societe Generale.

Sterling rose but overall reaction was muted as investors continued to bet the Bank of England would cut interest rates to a record low of 1 percent on Thursday.

While most components picked up from record lows hit at the end of last year, they remained consistent with further falls in output.

The services sector makes up around three-quarters of Britain’s economy and has contracted every month since May.

GLIMMER OF HOPE?

Unprecedented cuts in interest rates and tumbling energy costs have both given firms some cheer but the macroeconomic backdrop remains bleak.

Unemployment in Britain rose to almost 2 million at the end of last year and could top 3 million in 2010, according to Bank of England monetary policy committee member and labour market expert David Blanchflower.

Even if interest rates are cut to 1 percent this Thursday, as most economists expect, borrowing costs faced by businesses may not fall.

“There were many reports that the economic climate remained extremely difficult and that business pipelines had dried up,” the survey noted.

“Respondents commented on a lack of confidence in product markets and that clients were reluctant to commit new business spend given recession, reduced budget positions and the uncertain climate.”

Surveys of Britain’s manufacturing and construction sectors earlier this week have pointed to a similar picture of continued contraction but at a slower pace.

Markit said the figures, taken together, suggested the economy was contracting at an annual rate of more than 2 percent.

“While improvements in the activity and new business indices are encouraging, the sector remains in a very weak state,” said Paul Smith, senior economist at Markit Economics.

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Editing by Stephen Nisbet and Andy Bruce

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