Service slump prompts calls for rate cuts

Business leaders today urged the Bank of England to cut interest rates as fresh figures showed the services sector had suffered a slump in sales and orders while wage inflation had plunged to its lowest level on record.

The British Chambers of Commerce said the economy faced a "dangerous situation" as its latest quarterly survey confirmed that the fragile recovery seen at the tail end of 2002 had evaporated this year.

Meanwhile, official figures showed wage inflation in the services sector had fallen to its lowest level for at least a decade, thanks to a sharp fall in City bonus payments.

David Frost, the BCC's director general, said: "The sharp deterioration in business conditions, particularly the export market, is alarming. In view of this dangerous situation, it is particularly important for the Bank to sustain its flexible stance, and act rapidly if circumstances worsen."

Its survey of members for the first three months of the year showed sales and orders fell in both home and overseas markets while investment plans, employment and cash flows worsened for both manufacturers and services companies.

"While the results may have been partly affected by exceptional uncertainties linked to the events in Iraq, it is clear they signal a genuine worsening in the circumstances within which UK businesses, across all sectors, have to operate," Mr Frost said.

This was reflected in a sharp fall in wage deals and bonus packages in the services sector, according to figures from the Office for National Statistics.

Private sector services' earnings grew at an annual rate of just 1.8 per cent in February, down from 2.9 per cent in January and the lowest level since March 1991. Bonuses are down by more than 2 per cent compared with a year ago. The ONS said it hoped to have estimates of the total fall in bonus payments next month.

Overall wage inflation dropped to 2.4 from 3.2 per cent, which economists in the City said could be used as another justification for cutting rates next month.

Martin Essex, senior economist at Capital Economics, said that with inflation running at 3 per cent, real average earnings were now falling. "We fear a sustained rise in unemployment and poor growth in real earnings that would hit consumer spending quite hard," he said. "Accordingly, we think the Bank will reduce rates all the way down to 3 per cent by the end of the year, with the next cut probably coming in May."

The figures also showed that at 5.1 per cent, public sector pay is now rising at twice the pace of the 2.5 per cent for the private sector. The gap is the largest since 1992.

There were mixed signals in terms of unemployment with the number claiming jobless benefits rising for the second month in a row in March, but the preferred measure showing unemployment falling again.

The claimant count rose 1,800 last month, after jumping 5,700 in the month before. This was the first back-to-back rise in more than a year.

The Government's preferred measure showed unemployment in the three months to February fell 22,000 on the previous three months to a rate of 5.1 per cent, down from the 5.2 per cent recorded in the previous three months.