Slowdown in UK industry spreads to services

The slowdown in UK manufacturing is spreading to the once-buoyant services sector, a key survey revealed yesterday. The data was seen by the Bank of England before it cut interest rates to 5 per cent on Thursday, and economists said it increased the likelihood of a further rate cut.

According to the Chartered Institute of Purchasing and Supply (CIPS), activity in the service sector was at its weakest level since February 1999. It fell from 52.1 in June to 50.3 in July, where a figure below 50 indicates contraction.

Transport and communications were among the worst-hit segments as falling manufacturing output hit demand for haulage and the US slowdown hit tourism and catering.

For the second consecutive month, there was no growth in service sector employment, and only 13 per cent of firms recruited during July. However, wage inflation and higher fuel prices contributed to an overall increase in costs.

Orders outstanding fell at the fastest rate in five years, and in all sectors except information technology. Service sector optimism fell to its lowest since December 1998, when the Asian economic crisis was at its height. However, more than half of firms surveyed expected activity to be up in 12 months.

"July's survey found that growth had slowed to near stagnation," CIPS said. "Firms reported that waning business confidence had led increasing numbers of clients to defer their spending and exercise caution over their budgets," CIPS said.

John Butler, UK economist at HSBC, said it no longer appeared as though the second quarter of the year would mark the trough ahead of a pick-up later this year. "There could be a lot more bad news to come in the second half," he said. "We'll see a sharp slowdown this year, but we would not be talking about recession."

The gloomy outlook was compounded by research by the Government and PricewaterhouseCoopers showing that the manufacturing slowdown contributed to a 9.3 per cent annual increase in company liquidations in the second quarter. Administrations were up for the third successive quarter, growing 13 per cent.

There was better news from the US, where new data showed unemployment held flat at 4.5 per cent in July. That confounded forecasts of a slight rise, to 4.7 per cent, which might have prompted the US Federal Reserve to make a further cut in interest rates.

Payrolls fell 42,000 in July for the 12th consecutive month, having dropped 93,000 in June, a revision from 114,000.

Robert Blake, a senior economist at Royal Bank of Scotland Financial Markets, said: "The labour market is not deteriorating any further and may be starting to improve."