Economic slowdown damages service sector
Julia Kollewe
guardian.co.uk,
Wednesday June 4 2008
Britain's services sector contracted last month for the first time in more than five years, hit by declines in new business and rising costs.
Data released this morning also showed that firms are laying off staff at the fastest rate in over a decade, as the economic slowdown continues to bite.
The index measuring activity in the services sector fell to 49.8 in May from 50.4 in April, the lowest reading since the start of the Iraq war in March 2003, according to the latest survey from the Chartered Institute for Purchasing and Supply and NTC. A reading below 50 indicates contraction.
"The latest set of of results makes for rather grim reading with the worry of stagflation in the UK now increasingly real," said Paul Smith, an economist at NTC.
The services sector makes up nearly three-quarters of the economy and further evidence of slowing economic activity combined with rising inflationary pressures will make the Bank of England's task of setting interest rates even harder.
The Bank is widely expected to leave interest rates at 5% when it finishes its two-day meeting tomorrow, and no downward move is expected for some time.
With inflation rising, the index tracking firms' costs spiked to a record 67.7 last month from 67.3 in April. Fuel was cited as the key factor driving up costs, exacerbated by higher raw material and food prices as well as the weaker pound.
Companies were able to pass on some of the cost increases to their customers, with the index of prices charged climbing to 55.8 from 55.2.
Shop prices also rising
A separate survey from the British Retail Consortium today showed shop prices rising at an annual rate of 1.8% last month compared with 1.2% in April, fuelled by food price inflation of 6%. Non-food prices dropped 0.4% on the year.
"The growing gloom surrounding the UK's growth prospects should help to constrain corporate pricing power and point to lower inflation in the medium term," said James Knightley at ING. "However, rate cuts are unlikely to start coming through until late in the third quarter and then accelerate in early 2009."
Business expectations hit the lowest level since October 2001 when confidence slumped in the aftermath of September 11. New business also fell in May, with the index hitting 48 compared with 51.5 previously.
Following nearly 60 consecutive months of growth, employment at services firms fell sharply last month. The employment index dropped to 46.5 from 51.0 - the sharpest decline recorded since the survey was launched almost 12 years ago.
"Against this backdrop of rising costs, a weakening demand environment and faltering sentiment in the sector, it was perhaps unsurprising to observe a drop in employment," Smith said. "However, it is the scale of the fall that is likely to make policymakers sit up and take notice."
guardian.co.uk,
Wednesday June 4 2008
Britain's services sector contracted last month for the first time in more than five years, hit by declines in new business and rising costs.
Data released this morning also showed that firms are laying off staff at the fastest rate in over a decade, as the economic slowdown continues to bite.
The index measuring activity in the services sector fell to 49.8 in May from 50.4 in April, the lowest reading since the start of the Iraq war in March 2003, according to the latest survey from the Chartered Institute for Purchasing and Supply and NTC. A reading below 50 indicates contraction.
"The latest set of of results makes for rather grim reading with the worry of stagflation in the UK now increasingly real," said Paul Smith, an economist at NTC.
The services sector makes up nearly three-quarters of the economy and further evidence of slowing economic activity combined with rising inflationary pressures will make the Bank of England's task of setting interest rates even harder.
The Bank is widely expected to leave interest rates at 5% when it finishes its two-day meeting tomorrow, and no downward move is expected for some time.
With inflation rising, the index tracking firms' costs spiked to a record 67.7 last month from 67.3 in April. Fuel was cited as the key factor driving up costs, exacerbated by higher raw material and food prices as well as the weaker pound.
Companies were able to pass on some of the cost increases to their customers, with the index of prices charged climbing to 55.8 from 55.2.
Shop prices also rising
A separate survey from the British Retail Consortium today showed shop prices rising at an annual rate of 1.8% last month compared with 1.2% in April, fuelled by food price inflation of 6%. Non-food prices dropped 0.4% on the year.
"The growing gloom surrounding the UK's growth prospects should help to constrain corporate pricing power and point to lower inflation in the medium term," said James Knightley at ING. "However, rate cuts are unlikely to start coming through until late in the third quarter and then accelerate in early 2009."
Business expectations hit the lowest level since October 2001 when confidence slumped in the aftermath of September 11. New business also fell in May, with the index hitting 48 compared with 51.5 previously.
Following nearly 60 consecutive months of growth, employment at services firms fell sharply last month. The employment index dropped to 46.5 from 51.0 - the sharpest decline recorded since the survey was launched almost 12 years ago.
"Against this backdrop of rising costs, a weakening demand environment and faltering sentiment in the sector, it was perhaps unsurprising to observe a drop in employment," Smith said. "However, it is the scale of the fall that is likely to make policymakers sit up and take notice."
Labels: employment, service sector, United Kingdom
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