October 5, 2010 / 8:31 AM / in 9 years

September services activity unexpectedly rises

LONDON (Reuters) - Services activity growth unexpectedly accelerated in September from a 16-month low, but the outlook is poor with the weakest inflow of new business in more than a year, a survey showed on Tuesday.

The figures did little to alter expectations that the Bank of England will keep its ultra-loose policy stance unchanged later this week and probably well into next year.

The Markit/CIPS services PMI index increased to 52.8 from 51.3, versus economists’ expectations for a slight fall to 51.0, causing British share prices to rally and sterling to strengthen against the dollar and euro.

“Today’s survey at least provides some reassurance that the economy is not plunging head-first into a renewed contraction,” said Capital Economics’s Vicky Redwood.

However, planned cuts to government departments’ spending of around a quarter over the next five years already seem to be affecting the firms covered in the survey, which excludes most activity in the public and retail sectors.

“Inflows of new work and prospects for the year ahead have been hit by widespread worries that the recovery is losing steam, cancelled government contracts and the prospect of more cuts to come,” said Markit’s chief economist, Chris Williamson.

The new business component slowed to a 15-month low of 51.3 from 51.4. Business expectations for the coming year increased to a four-month high but remained subdued by historic standards.

“Unless trends in new business show an improvement soon, the lack of confidence is consistent with a downturn in business activity in the coming months,” Williamson said.

Economists said the purchasing managers’ survey, alongside a fall in its manufacturing counterpart last week, pointed to growth in gross domestic product (GDP) slowing to 0.1-0.2 percent by the end of the year, as one-off factors aiding recovery fade and spending cuts start to bite. Growth hit a nine-year high of 1.2 percent in the second quarter.

“It’s still consistent with very slow quarter-on-quarter GDP growth of just above zero, which is much below what the Bank of England expects,” said BNP Paribas economist Alan Clarke.

Markit said third-quarter service-sector growth was the weakest since the second-quarter of 2009. The Office for National Statistics reported 0.2 percent monthly falls in output for the entire service sector — which makes up around three quarters of the economy — for June and July.

The Bank is currently torn between raising rates, due to above-target inflation and a gradual recovery from last year’s recession, and increasing quantitative easing because of worries about a global economic slowdown and public spending cuts.

The PMI survey points to some easing in inflation pressures which have made the Bank’s Monetary Policy Committee wary of further loosening monetary policy up to this point.

The prices charged index fell for the first time since March. But this may prove to be a temporary dip, as firms’ costs rose at the fastest pace since May, due to higher fuel, utility and food costs.

The employment balance showed no net change to employment in the sector, after two months of modest job-shedding.

Editing by Stephen Nisbet and Susan Fenton

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