Service sector slowdown adds to economic gloom

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The Independent Online

Business activity in the UK's dominant services sector fell back last month, according to the final of three snapshot industry surveys pointing to an economic slowdown.

Business activity in the UK's dominant services sector fell back last month, according to the final of three snapshot industry surveys pointing to an economic slowdown.

A keenly watched index of firms that make up two-thirds of the economy came in below City expectations to its lowest level since the start of the year.

The Chartered Institute of Purchasing Supply (Cips) said its survey of managers in businesses ranging from restaurants to investment banks showed that output, orders, job creation and prices charged all fell back in May. That follows separate surveys by Cips showing that the manufacturing sector suffered its worst fall since the Iraq war while the construction industry slowed as the house building sector stagnated.

Analysts said a composite index of all three sectors pointed to the next move in interest rates being a cut. Ciaran Barr, chief UK economist at Deutsche Bank, said: "This keeps us on track for a rate cut in August."

The overall index of services activity fell to 55.1 from 56.5 in April on a scale where a number over 50 equates with expansion.

Confidence for the future dipped to 71.5 from 71.8 in April, its lowest since the start of the Iraq war in March 2003 and well below the readings above 80 at the start of 2004.

The readings will be closely examined by the nine economists on the Bank of England's monetary policy committee when they sit down for their two-day interest rate debate on Wednesday.

Alan Castle, UK economist at Lehman Brothers, said:"The relationship between the composite index and base rates has been quite strong historically, so it is possible to argue that the MPC is likely to drop any remaining tightening bias in the coming months."

Last month Paul Tucker, one of the five Bank officials on the MPC, dropped his call for a rate rise, leaving Sir Andrew Large, one of the deputy governors, as the lone "hawk". Since their last meeting first quarter GDP growth has been revised down, consumer spending growth has slowed to a decade low, industry has moved into recession and retail sales and credit card spending are both sluggish.

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