UK service sector growth slows in November

City A.M. Reporter
GROWTH in UK service sector activity slipped back slightly in November, suggesting a slowdown in overall fourth-quarter economic output and no change to monetary policy anytime soon.

The headline business activity index in the Markit/CIPS PMI index eased to 53.0 in November from October's four-month high of 53.2 and bang in line with the forecast, as new business picked up at its fastest rate since June.

But analysts said the figure was slightly disappointing following a run of better-than-expected manufacturing and construction growth and implied a slowdown in overall GDP growth for the final three months of the year.

"It's not disastrous but it's definitely sub-trend," said Ross Walker of RBS. "It's in the services sector where the recovery is more vulnerable, and there are some sectors which are vulnerable to weaker consumer and domestic demand.

"It's mildly disappointing and is just going to reinforce the near-term policy inertia."

The new business index rose to 52.4 from 52.0 in October, the highest reading since June, and business confidence also improved.

However, employment fell at a faster rate than October and firms also ran down backlogs of work, suggesting a build-up of spare capacity.

The figures are therefore unlikely to alter expectations that the Bank of England will keep policy loose as it waits to see how planned government spending cuts hit demand.

"(It's) perhaps a bit disappointing after the recent run of improved news on the economy," said Vicky Redwood of Capital Economics.

"Given the sharp pick-up in the manufacturing PMI earlier this week, a composite measure of the CIPS surveys still rose in November. But, on the face of it, it points to quarterly GDP growth of just 0.3 per cent or so."

The headline services activity index has been above the 50-level which separates contraction from expansion for more than a year-and-a-half but November's pace of growth was again below the survey average.

Markit economist Paul Smith said the growth in the UK service sector activity was solid but described the rise in new work as still lacklustre as economic uncertainties undermined business and consumer spending.

"With the survey's data on backlogs and confidence pointing to sluggish expansion in the near-term, we expect the sector to make a reduced contribution to UK economic growth in Q4," he said.

"Moreover, the sector's present growth profile suggests it is unlikely to generate any meaningful job creation and help to offset expected employment cuts in the public sector."

Employment in the sector declined at a slightly faster rate than in October as a number of respondents chose not to replace leavers or to implement redundancies.

Markit said business expectations had improved since October although the degree of business confidence in the UK service sector remained historically low due to fears over government spending cuts.

And inflation pressures eased last month, with firms raising prices at a slower pace than in October, in line with a slight slowdown in their own costs.

Overall, Friday's survey suggests the services sector is not expanding as quickly as the manufacturing sector, where activity picked up at its fastest pace in 16 years in November due in part to strong exports.