Services Slowdown Prompts Rates Cut Talk

Growth in the UK's dominant services sector slowed sharply last month, setting the economy on course for a grim first-quarter GDP performance and increasing speculation about a possible interest rate cut.

The vast services sector, which ranges from restaurants to law firms, represents three-quarters of economic output and has led Britain's recovery.

But a reading of 52.7 on the Markit (NasdaqGS: MRKT - news) /CIPS services purchasing managers' index (PMI) for February - where the 50 mark separates growth from contraction - was the weakest since March 2013 and well below economists' expectations.

It (Other OTC: ITGL - news) pointed to all-sector growth at its slowest since April 2013 and suggested UK gross domestic product (GDP) on course to grow at 0.3% in the first quarter of this year, a slowdown from 0.5% in the final three months of 2015. It would be the poorest performance since late 2012.

Markit chief economist Chris Williamson said survey responses showed firms were worried about faltering demand as well as uncertainty over the EU referendum, and concerns about financial market volatility and weak economic growth at home and abroad.

Mr Williamson said: "The extent of the slowdown will be a shock to policymakers and surely puts to bed any talk of the Bank of England raising interest rates.

"The focus will instead increasingly shift to whether policymakers may soon need to dig deeper into their toolbox to introduce new measures to shore-up the economy with additional stimulus, and what tools might be used.

"History shows that the PMI has now moved down into territory normally consistent with the central bank cutting interest rates rather than hiking."

But Vicky Redwood, chief UK economist at Capital Economics, said that while uncertainty could continue to hold back the recovery in the near term, other indicators were strong.

"With (Other OTC: WWTH - news) consumers' real earnings still rising quite strongly, we doubt that the economic recovery is about to slow sharply," she said. "And we are still quite optimistic about the UK's prospects further ahead."

UK rates have been at a record low of 0.5% since 2009. Prospects of a hike have repeatedly been pushed back, most recently due to fears over global growth.

Last month Bank of England governor Mark Carney even shifted away from previous assurances that the next move in rates is most likely to be a hike.