U.K. Services Grow Least in Five Months; Euro Area Also Weakens

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U.K. services expanded at the slowest pace in five months in May, casting doubt on the economy’s recovery from the weakest performance since 2012 in the first quarter.

An index of business activity fell to 56.5 from 59.5 in April, Markit Economics Ltd. said on Wednesday in London. Economists had forecast a decline to 59.2, according to the median estimate in a Bloomberg survey.

A separate report showed services in the euro area -- Britain’s largest trading partner -- also slowed in May. Markit said that shows the 19-nation currency region’s recovery still needs central bank stimulus.

The U.K. survey, taken with the recent manufacturing and construction numbers, points to economic growth of 0.5 percent in the second quarter after a 0.3 percent expansion in the first three months of the year, according to Markit. The Bank of England cut its 2015 growth forecasts last month and will probably keep its benchmark interest rate at a record low on Thursday.

The figures raise “doubts about the ability of the economy to rebound convincingly from the weakness seen at the start of the year,” said Chris Williamson, chief economist at Markit. “The lackluster growth picture will be a concern to policy makers and effectively kills off the chances of any imminent hiking of interest rates by the Bank of England.”

Pound Weakens

The pound weakened against the euro for a sixth day, its longest run of losses in more than a year. It was at 72.83 pence per euro as of 11:32 a.m. London time, down 0.2 percent on the day. It fell 0.4 percent to $1.5282. The 10-year gilt yield was little changed at 1.98 percent.

The fall in the U.K. services index was the largest since August 2011. Still, inflationary pressures increased and the labor market tightened further, Markit said. In addition, business uncertainty faded after the general election on May 7 produced an unexpected parliamentary majority for Prime Minister David Cameron’s Conservative Party.

That suggests the slowdown seen last month may be temporary and rate increases later this year “should not be ruled out,” Williamson said.

Services in the euro area cooled to 53.8 in May from 54.1 in April, as high unemployment continues to limit spending on goods and services. A composite of services and manufacturing slipped to 53.6 from 53.9.

The euro area is benefiting from the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) stimulus program, and Markit said its surveys show the measures are essential to put the recovery on a more stable footing. While a deflation threat has faded and the economy has posted quarterly expansion for two years, price growth remains well below the ECB’s goal.

The central bank’s measures “have been an important factor lifting business and consumer confidence,” Williamson said. “Any suggestions that QE asset purchases may need to be reined in early look premature given the fragility of growth.”

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