City analysts said recently that the slowdown in the PMIs in January had put paid to any possibility that the Bank of England might raise interest rates at the meeting of its monetary policy committee this week.
The Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The SIPMM survey covers all manufacturing sectors. The Markit survey covers private sector companies, but not the public sector.
The service sector dominates the UK economy, contributing around 80% of GDP. The financial services industry is particularly important, and London is the world’s largest financial centre. Britain’s aerospace industry is the world’s second-largest national aerospace industry.
The analysts believe The Bank of England is almost guaranteed to leave interest rates unchanged at 0.5%, after the news of poor service sector activity in April ended any remaining justification for a rise.
There had been confidence between analysts and investors that the Bank would raise the rate to 0.75% on 10 May. In a recent report in The Times the markets put the chance at 90%, but that has now diminished to just 10%.
After last month’s weak growth and inflation figures, which had already made a rate rise seem unlikely, the poor performance of service industry is just the latest blow. The pound, which had been rising on expectations of a rate rise, has fallen back in recent days.
The UK services sector grew at its slowest pace in January since the aftermath of the EU referendum as the economy got off to a sluggish start in 2018.
The latest health check of a sector that includes hotels, restaurants, transport and the City from IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) found that a loss of clients and lingering Brexit uncertainty had led to a dip in activity.
The monthly purchasing managers’ index from IHS Markit/CIPS fell from 54.2 points in December to 53.0 in January, its weakest since September 2016 and only slightly above the 50.0 cut-off point between expansion and recession.
Similar surveys for manufacturing and construction, released last week also showed signs of slower UK growth at a time when other major economies – the US, the Eurozone and Japan – have been expanding strongly. Services account for almost four-fifths of the UK’s gross domestic product,
The chief business economist at IHS Markit, Chris Williamson, which compiles the survey, said the three PMI surveys were consistent with the economy growing at 0.3% in the first three months of 2018 this is down from .5% in the final quarter of 2017
“The pace of UK economic growth slowed sharply at the start of the year as January saw a triple whammy of weaker PMI surveys,” he said.
He went on “Service sector expansion slid to a 16-month low, reflecting a marked waning in growth of demand for business and consumer-facing services such as hotels and restaurants. Demand for transport and communication services was down for the second straight month.”
The services PMI showed that companies continued to hire staff amid positive expectations about the outlook for their businesses, despite weaker expansion than seen in 2017, The survey also reported an easing of the inflationary pressures that emerged as a result of the fall in the pound after the EU referendum.