November 5, 2008 / 10:45 AM / 11 years ago

UPDATE 1-UK service sector shrinks at record pace in Oct

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- Weakest headline index since series began in July 1996, sixth straight month of contraction

- Weakest employment, new business, outstanding business and expectations index levels since series began

- Prices charged index lowest since February 2006, input prices index lowest since September 2007

By David Milliken

LONDON, Nov 5 (Reuters) - Britain’s dominant services sector shrank in October at its fastest pace since the series began in 1996 and optimism, employment and new and outstanding business all slumped to record lows, a survey showed on Wednesday.

October’s services report from Britain’s Chartered Institute of Purchasing and Supply increases the odds that the Bank of England will cut rates on Thursday by more than the half percentage point forecast by economists — especially after grim manufacturing and construction data earlier this week.

The headline services activity figure of 42.4 was well below the mid-range forecast of 44.5 from a Reuters poll ECONGB and September’s 46.0 reading. It marks the sixth straight month below the growth threshold of 50 for the sector, the longest losing streak in the survey’s 12-year history.

Official data published separately showed manufacturing output fell for the seventh month running in September, the longest stretch of declines in 28 years.

The pound dropped around half a cent against the dollar GBP= after the data as investors bet a big rate cut from 4.5 percent would be on the cards for Thursday.

“The sharp deterioration in October’s report on services could well be enough to tip the balance in favour of a full 100 basis points cut at tomorrow’s MPC meeting,” said Vicky Redwood at Capital Economics.

“Overall, these figures provide further evidence that the UK is entering a deep recession. Whatever happens tomorrow, interest rates need to fall to very low levels.”

The survey’s price data should reassure the Bank of England that British inflation will still fall from its current record 5.2 percent even if interest rates are cut aggressively from their present level of 4.5 percent.

Prices charged by the services sector — which spans businesses from cafes to banks, and makes up three quarters of British economic output — rose at their slowest pace since February 2006, and the sector’s input costs rose at their weakest pace in 13 months.

BROADER GLOOM

Purchasing managers’ data from the construction sector on Tuesday showed the fastest pace of decline since that survey started over 10 years ago. Manufacturing PMI data also pointed to contraction, though at a slower pace than in September.

Service companies’ confidence was particularly hard hit by the heightened economic uncertainty in October that prompted the British government to unveil plans for a state-backed recapitalisation of leading high street banks, and the Bank of England to join a coordinated round of interest rate cuts led by the U.S. Federal Reserve.

“The global credit crisis continued to dominate the anecdotal findings, being widely cited as a factor undermining confidence and leading to heightened uncertainty. This in turn led to the postponement of decisions, the retrenchment of spending and an unwillingness to commit to new contracts,” the survey said.

Nonetheless, British unemployment seems set to continue to rise in line with a prediction by BoE monetary policy committee member David Blanchflower that joblessness would hit 2 million out of a 30-million-strong workforce in time for Christmas.

The survey said that nearly one in five of firms surveyed had cut staff in October through a mix of compulsory redundancies and not replacing employees who leave.

Hotels and restaurants reported the biggest fall in new business, followed by financial firms and those in transport, storage and communications.

“Evidence from this survey suggests that, in the near term at least, activity will continue to fall markedly in line with weak trends in pipeline business and growing spare capacity,” said Paul Smith, a senior economist at Markit Economics which compiled the data.

FOR TABLE OF SURVEY, DOUBLE-CLICK ON [GB/PMISRV]

FOR TEXT OF SURVEY, [GB/TEXTS] (Reporting by David Milliken; Editing by Ruth Pitchford)

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