UK service sector slows sharply

UK service sector slows sharply

Britain's dominant services sector slowed more sharply than expected last month as rising import prices hit firms' margins and confidence took a hit, a key survey showed today.

The Chartered Institute of Purchasing and Supply's report is closely watched by the Bank of England which meets next week to consider whether to cut interest rates again in the face of a growing credit crisis.

The CIPS/NTC index of activity in services, which account for two thirds of economic activity, dropped to 52.1 last month from 54 the month before. A number above 50.0 denotes expansion, but the drop in the index meant growth in activity was its slowest since last November.

"Following recent resilience, March saw the uncertainties that have dominated the economic debate in recent months take some toll on the sector,"said Paul Smith, economist at NTC.

Firms' confidence also took a tumble as the credit squeeze intensified and evidence emerged that the US economy may already be in recession. The business expectations index dropped to 65.8 from 69.3 in February, to stand just a whisker above January's six-year low of 65.4.

"Markedly softer service sector activity in March, along with tighter credit conditions, heaps pressure on the Bank of England to cut interest rates again next Thursday despite current elevated inflation concerns. It still looks a close call, but we expect the Bank of England to trim interest rates.....continued below

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from 5.25% to 5.00%. Further out, we see interest rates falling to a low of 4.00% in the first half of 2009," said Howard Archer, economist at Global Insight.

Paul Tucker, the Bank's executive director and a member of the monetary policy committee, said last night in a speech that the Bank was minded to reduce interest rates gradually in the face of tightening credit conditions but had to accept that higher inflation made cutting rates sharply problematic.

And the CIPS survey illustrated his point. The input prices index rose from 65.6 to 66.2, the highest since the series began in July 1996. The output price index eased a touch to 56.2 but remained within firing range of February's record high of 56.8.

"Price pressures persist, with cost inflation moving to a record high in March, and service providers continuing to pass on a significant chunk to their clients," said NTC's Smith. "This provides yet another reminder of the Bank of England's dilemma."

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