Services shock puts more stimulus back in play

 

Signs of a slowdown in the all-important services sector yesterday raised fresh fears over the state of the UK economy and heaped pressure on the Bank of England's Monetary Policy Committee to print more money in order to support growth.

A much-watched snapshot by Cips/Markit showed the services Purchasing Managers' Index falling to 50.6 in October, down from 52.2 the previous month. Any reading above 50 indicates growth, but economists warned that the fall in the index to its lowest level in two years points to slowing momentum.

The slippage follows last week's disappointing PMI survey for the manufacturing sector, which fell to 47.5, indicating the sixth successive month of contraction.

"The deterioration … echoes the manufacturing survey in suggesting that the 'green shoots' seen in the past few weeks may already be fading" said Vicky Redwood of Capital Economics.

The economy grew by 1 per cent in the third quarter of 2012, according to the most recent figures from the Office for National Statistics, ending Britain's nine-month recession. But that robust performance was flattered by Olympic ticket sales and analysts have pointed to the fragility of underlying growth.

The rate-setting MPC will meet this week to decide whether to inject more stimulus into the economy, on top of the £375bn of Government bonds that it has already acquired.

Several members of the MPC, including the Governor of the Bank of England Sir Mervyn King, have signalled in recent weeks that they are sceptical of the value of more easing, leading most analysts to expect no change.

But some suggested that the latest weak survey data could put more asset purchases back on the table.

"October's PMI surveys could mean the vote for further asset purchases this month could be a close one," said Nida Ali, economic adviser to the Ernst & Young Item Club.

The services PMI also pointed to a moderation of the growth of new orders and a fall in employment through the sector.

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