August 4, 2010 / 9:43 AM / 10 years ago

Services slowdown raises recovery fears

LONDON (Reuters) - Britain’s services industry grew at its slowest rate in 13 months in July, a survey showed on Wednesday, as worries about spending cuts weighed on confidence, raising fears about the strength of economic recovery.

The pound fell almost half a cent against the dollar after the data as investors bet that a weaker growth outlook would encourage the Bank of England to keep interest rates at their record low 0.5 percent for longer.

The Markit/CIPS services PMI headline activity index fell to 53.1 last month from 54.4 in June, its lowest level since June 2009 and below economists’ forecasts for an unchanged reading.

And firms’ expectations for the coming months improved only slightly from a 15-month low in June.

An equivalent survey of manufacturers this week also showed a slowdown in activity, and together the figures indicated that the 1.1 percent growth recorded between April and June would not be sustained later in the year as the spending cuts bite.

“It’s a little bit worrying because it suggests that economic growth might not be that strong going forward. And it’s quite important because this survey has got a reasonably good track record,” said George Buckley, economist at Deutsche Bank.

“This is simply going to raise questions about whether we are going to see double dip (recession). It’s not my forecast, we’re still expanding on these rates, but it’s still substantially lower than it was a few months ago.”

BoE rate setters start their two-day monthly meeting today and they are almost certain to leave borrowing costs on hold at 0.5 percent tomorrow, although even before the data economists were doubtful rates would rise before next year.

Even so, the outlook for policy is uncertain because policymakers will have to find a way to tame inflation — currently well above the Bank’s 2 percent target — while cushioning the blow to the economy from the austerity measures.

SPENDING CUTS TO WEIGH

The government in June announced plans for massive spending cuts designed to virtually eliminate the budget deficit over five years, and the measures are likely to translate into less business for the services industry.

A separate survey released on Wednesday indicated the cuts are already starting to bite, with the latest KPMG/REC report on jobs showing permanent hiring at its slowest in nine months due to a decline in demand for healthcare workers.

The employment component of the PMI survey, which covers businesses such as restaurants, hotels and financial services, but excludes shops and the public sector, slipped back into contractionary territory in July after minimal growth in June.

The business expectations component, while still above the 50 point level that divides growth from contraction, was only modestly above a 15-month low at 64.9.

“Expectations about prospects for the coming year appear to have down-shifted ... with reports of cancelled contracts and reduced enquiries adding to the sense that tough times lie ahead,” said Paul Smith, a senior Markit economist.

Separate good news on the housing market — a survey from Halifax showed house prices rose 0.6 percent last month, beating forecasts for a modest fall — failed to detract from the widely held view that prices will stagnate this year.

“We’re in the turning point where you’re getting the handover from government demand and restocking to private final demand, consumption, investment and exports,” said Simon Hayes, economist at Barclays Capital.

“It’s perfectly reasonable to expect growth in the second half of this year to be slower than in Q2. Today’s PMI is reflective of that.”

Editing by Stephen Nisbet

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