September 5, 2011 / 8:37 AM / 8 years ago

Services PMI suffers biggest drop in a decade

LONDON (Reuters) - Activity in the dominant services sector slowed at the fastest pace in a more than a decade last month, and firms’ confidence in future business weakened to a one-year low, adding to evidence of a stalling economic recovery.

Visitors admire St.Paul's Cathedral from the restaurant floor of the Tate Modern gallery in London March 15, 2007. REUTERS/Alessia Pierdomenico

Sterling slipped to a one-and-a-half month low versus the dollar after the data, and gilt futures rose to their highest in more than two weeks, as investors bet the figures increased the chance of monetary easing by the Bank of England.

The Markit/CIPS services purchasing managers’ index (PMI) fell to 51.1 in August from 55.4 in July. This was the second biggest fall on record, and confounded forecasts for a gentler drop to 54.0, although the index stayed above the 50 mark that divides growth from contraction.

The only time there was a bigger one-month fall in the index was during the foot-and-mouth disease crisis in April 2001, which hammered the agricultural sector and hurt tourism.

“This survey really rings the growth alarm bells,” said Howard Archer, an economist at IHS Global Insight. “Even allowing for any impact from the riots and a correction after a surprise spike up in services activity in July, this is a hugely disappointing survey.”

Companies cited economic uncertainty and slower growth in new business as the main reasons for weaker expansion last month. Survey compilers Markit said that riots across England in early August played only a minor role in depressing activity.

Markit economist Chris Williamson said the numbers pointed to a near-stagnation of the economy in the third quarter.

“Forward-looking indicators also suggest that the economy could weaken further at the end of the quarter, raising the prospect of a slide back into contraction in the fourth quarter — if not the third — and will provide ammunition for those seeking a further injection of stimulus into the economy by the Bank of England,” he said.

“The all-sector PMI is at a level which has always triggered interest rate cuts in the past,” he added.

The figures confirmed expectations that the Bank of England (BoE) will leave interest rates at 0.5 percent this week and ignited speculation the central bank will consider injecting more stimulus into the economy later this year.

“It certainly helps nudge them that way,” said RBS economist Ross Walker. “I’m not convinced we’re going to see a policy change this month, but November certainly becomes quite interesting. A lot will depend on financial market conditions.”

BROAD UK WEAKNESS

Last week, PMI surveys suggested that UK manufacturing was contracting at its fastest pace in more than two years, while construction activity grew at its slowest rate so far this year.

Scotia Capital economist Alan Clarke said he believed August’s PMI figures pointed to gross domestic product shrinking by 0.25-0.50 percent in the third quarter, even though the data averages above the 50 level which generally separates growth from contraction.

Companies’ input costs continued to surge, although at a slightly slower rate, but the prices they charged barely rose, suggesting demand was not strong enough to allow them to pass rising costs onto customers.

Businesses’ expectations for the future were the weakest in a year, with the relevant sub-index sliding to 65.1 from 67.3 in July. Around 44 percent of respondents forecast a rise in activity from current levels in a year’s time, with some expecting to benefit from the London 2012 Olympics, while about 13 percent predicted a decline.

The shaky economic climate and worries over the impact of government spending cuts were also said to weigh on sentiment.

Employment in the services sector continued to fall, with that index recording its lowest reading since January, as backlogs of work declined.

Despite the subdued data, services still outperformed the manufacturing sector, which shrank at its fastest pace in more than two years in August, hurt by a sharp drop in demand for exports, another Markit/CIPS survey showed last week.

Additional reporting by David Milliken; Editing by Susan Fenton/Ruth Pitchford

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