July 3, 2009 / 8:35 AM / in 11 years

Recovery in services sector slows in June

LONDON (Reuters) - The dominant services sector expanded for a second month in June but the pace of recovery slowed as new business contracted and firms stepped up the pace of job cuts, a monthly survey showed on Friday. The headline PMI index eased to 51.6 from 51.7, confounding expectations for an improvement to 52.0.

A waiter adds finishing touches to a table setting before the first lunch sitting at The Ritz restaurant in London in this April 17, 2006 file photo. REUTERS/Stringer

Last month’s leap above the 50-mark that denotes growth raised hopes that Britain may be one of the first major economies to emerge from recession.

While a pause in momentum may not be a huge setback given the pace of improvement in recent months, it will play into policymakers’ fears that a sustained recovery is far from assured.

“The sideways movement in the headline business activity index in part reflects some consolidation,” said Paul Smith, senior economist at Markit.

“Nonetheless, the underlying data indicate that the business climate remains fragile with tight lending conditions and rising unemployment remaining key threats to continued service sector recovery.”

There was little market reaction to the figures with investors convinced the Bank of England will keep interest rates at record lows for some months to come.

Neither does the Bank appear in any rush to reverse its policy of pumping money into the economy to boost demand. Indeed, the current debate is whether the Bank will raise its target for quantitative easing with many economists expecting an increase to 150 billion pounds to be announced as early as next week.

FRAGILE RECOVERY

The economy shrank at its fastest pace in more than 50 years in the first three months of this year but better data in recent months has generated hope of a return to growth in either the second or third quarters of this year.

Nevertheless, economists have also cautioned that much of the recent pick-up in activity could be due to re-stocking after firms ran down inventories last year.

Heightening such concerns, the new business index fell to 49.7 in June from 51.8 in May — the first decline in the index since November.

“It is somewhat concerning that new business has come off but it’s a lot better than a few months ago,” said Amit Kara, an economist at UBS.

In a bid to support sales, average output prices were cut for an eighth consecutive month in June. In contrast, average input prices picked up slightly on the back of higher fuel costs.

Despite the fall in new business and further job losses, business confidence continued to rise in June with the expectations index hitting its highest level in almost two years.

Separate data from the Bank showed Britons injected more than 8 billion pounds of equity into their homes in the first three months of the year.

Britons have injected equity into their homes now for four consecutive quarters, reversing the trend of equity withdrawal to fund other spending that has dominated the past decade.

With consumers no longer using their homes as cash machines, analysts are concerned that consumption will suffer as a key source of funding is turned off.

“Consumer spending was weak in the first quarter of the year and it remains to be seen whether negative equity withdrawal will continue if the housing market stabilises later this year,” said Philip Shaw, chief economist at Investec.

Detailed PMI data are only available under licence from Markit and customers need to apply to Markit for a licence.

To subscribe to the full data, click on the link below: here

Editing by Toby Chopra

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