March 4, 2009 / 9:41 AM / 11 years ago

Services shrink in February

LONDON (Reuters) - The services sector shrank sharply in February, but the pace of decline eased for a third month in a row and the rate of job cuts slowed a fraction, purchasing managers’ data showed on Wednesday.

The services sector accounts for three-quarters of British economic output, and the data may give the Bank of England cautious optimism that the economic downturn is starting to bottom out when policymakers vote on interest rates on Thursday.

The headline PMI activity index rose to 43.2 in February from 42.5 in January, better than analysts’ expectations of a fall to 41.8 and above November’s 40.1, the weakest result ever recorded in the series’ 12-year history.

Companies’ expectations for the coming year were their brightest in 5 months, the survey by the Chartered Institute of Purchasing and Supply and Markit showed.

“I would hesitate to be too confident for prospects for services, but there is some evidence that the decline is bottoming out,” said Philip Shaw, economist at Investec.

The improvement could be due to the impact of monetary and fiscal stimulus on the economy, as well as the end of the one-off downward effect on demand from companies reducing stock levels in the last three months of 2008, Shaw said.

Nonetheless, the headline figure is well below the 50 mark that divides contraction from growth, and does not alter expectations that the Bank will cut interest rates by half a percentage point this week to 0.5 percent, with little visible market reaction to the data.

“I wouldn’t go overboard — it will be a while before we see a significant recovery. This should have a limited impact on Bank monetary policy as the Bank’s inflation forecasts are so far below target. These numbers don’t change that,” said Shaw.

RAPID JOB CUTS

Services employers reported that they cut jobs at a near-record pace, with this component only rising fractionally from last month’s series low of 40.2.

The gloomy news was confirmed in a separate survey released by the Recruitment and Employment Confederation and accountants KPMG which shows temping agencies represented by the REC reported staff demand dropping at a record pace in February.

Take-home pay grew at its slowest rate in at least five years in February at an annual 2.4 percent, according to data from wage processors VocaLink.

Fierce competitive pressures ensured that firms cut their prices for a fourth month in a row, and input prices rose at the slowest pace in the services PMI survey’s history, with that sub-index easing to 50.3 from 50.7.

Confidence about business conditions in a year’s time showed a modest recovery. Some 38 percent of firms forecast higher activity in 12 months’ time, CIPS/Markit said.

Editing by Ruth Pitchford and Andy Bruce

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