Shock setback in growth puts British recovery at risk

An average of Cips’ three surveys – manufacturing, construction, and services – was the weakest for two-and-a-half years

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A shock setback for the UK’s dominant services firms cast doubt about the sustainability of the recovery yesterday, amid the slowest pace of growth in more than two years.

The latest worrying snapshot from the Chartered Institute of Procurement & Supply comes on the eve of the Bank of England’s latest rate-setting meeting, at which the Monetary Policy Committee is poised to hold rates at their all-time low of 0.5 per cent. 

Although the Cips index remains above the 50 “no-change” mark, September’s reading for services firms – ranging from hotels and restaurants to IT and accountants – fell from 55.6 to 53.3, a sharper than expected drop signalling the weakest pace of growth since April 2013. 

Firms are still hiring but some “reported hesitation among clients in placing new contracts, linked to global economic uncertainty”.

Moreover, an average of Cips’ three surveys – manufacturing, construction, and services – was also the weakest for two-and-a-half years, according to survey compiler Markit. Markit said the trio of surveys signalled growth of only 0.5 per cent for the wider economy in the latest quarter, down from 0.7 per cent between April and June.

“The question now is whether this move is here to stay,” said Liz Martins, a senior economist at HSBC. “If it is, it poses downside risks to growth in both Q3 and particularly Q4, and gives pause for thought to even the most hawkish MPC members.” 

David Noble, Cips’ chief executive, added that the “further softening of growth ... must now be causing some concern for the sustainability of the recent recovery in the UK economy”.

The pound dipped following the survey as money markets bet against an interest rate rise. Economists said financial markets are not pricing in a move higher from the Bank until October 2016 – almost a decade after the Bank last raised interest rates back in July 2007, before the financial crisis. 

Experts also said the downbeat survey would intensify the debate on the nine-strong MPC. Dovish chief economist Andy Haldane has said “there could be a need to loosen rather than tighten the monetary reins” if downside risks emerge. But hawk Ian McCafferty is pushing for an interest rate rise amid worries about wage inflation. 

Chris Williamson, chief economist at Markit, said: “The slowdown pushes the surveys into territory which would normally be associated with the Bank of England starting to consider more measures to stimulate the economy rather than hiking interest rates. 

“Persistent weakness in the manufacturing sector has increasingly spread to the far larger services economy. There are also signs that consumers have become more cautious and are pulling back on their leisure spending, such as restaurants and hotels.”