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Weak services growth adds to fears of slowdown

Weak growth in services, the UK economy’s dominant sector, further reduced the chances of an interest rate increase by the Bank of England next week.  

The closely watched IHS Markit purchasing managers’ index (PMI) for the services sector rose from 51.7 in March to 52.8 in April, below an expected increase to 53.5. IHS Markit described growth in the sector as “subdued”.

Paul Hollingsworth, senior UK economist at Capital Economics, said: “The slight pick-up in the services PMI in April will do a little to assuage fears that the economy has suffered a loss of underlying momentum and makes the chance of an interest rate hike next week extremely slim.”

The disappointing PMI reading followed official data last week which showed that the economy grew by just 0.1% in the first quarter of the year.

IHS Markit’s research cited weak consumer spending and concerns over the domestic economic outlook.

Meanwhile, the manufacturing PMI fell to a 17-month low of 53.9 in April, from 54.9 in March. The construction PMI bounced back to 52.5 from 47. But with planned cutbacks in public sector investment, a sustained recovery for construction is thought unlikely this year. 

Chris Williamson, chief business economist at IHS Markit, said the three PMIs “collectively showed only a muted rebound in business activity after being disrupted by heavy snowfall in March”.

Taken together, they “suggest that the underlying performance of the economy has continued to deteriorate”.

“The overall expansion signalled by the three surveys in April was the second-weakest since the Brexit vote, pointing to a quarterly rate of GDP growth of around 0.2% at the start of the second quarter,” he said.

Elsewhere, Bank of England data showed consumer borrowing fell sharply to £300m in March from £1.7billion in February - the lowest figure since November 2012. The annual rate of credit growth reduced from 9.4% to 8.6%.

Samuel Tombs of Pantheon Economics commented that the fall coincides with a drop in consumer confidence and an increase in savings intentions as consumers become more cautious.  

Shop prices continued to fall overall in April, according to the British Retail Consortium/Nielsen shop price index. Shop price deflation remained at 1%, with non-food prices down 2.2% but food prices up 1%.  

Helen Dickinson, BRC chief executive, said: “Higher global commodity prices than last year pushed food price inflation upwards in April. On the other hand, non-food prices sunk further into deflation as retailers continue to respond to the squeeze on households’ discretionary spending by offering low and falling prices.”

Mike Watkins, Nielsen’s head of retailer and business insight, added: “Recent industry data suggests poor footfall and, with unseasonably cool weather punctuated by a brief hot spell, sales momentum has been hard to sustain. So, whilst promotional activity continued after Easter, retailers are still keeping prices competitive to tempt shoppers back into store."


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Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

 

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