U.K. Services Slowdown Takes Shine Off Economic Optimism

Updated on
  • PMI index drops to 53, below the 54.1 forecast by economists
  • Data casts doubt on any imminent BOE rate hike: IHS Markit

BNP's Saywell Sees Too Much Optimism in Pound

Britain’s services growth weakened more than expected at the start of the year, casting a cloud over the economy following some recent positive figures.

IHS Markit’s Purchasing Managers Index fell to 53 in January from 54.2 in December. That’s the lowest since September 2016 and well below the 54.1 economists had forecast.

Along with reports last week showing a slowdown in manufacturing and a near-stagnation in construction, Markit said the gauges suggest economic growth has slowed “sharply.” They come just days before the Bank of England’s latest policy decision, when it will also update forecasts that are key to the outlook for interest rates.

The disappointing PMI readings are in contrast to data showing the economy expanded 0.5 percent in the fourth quarter and employment growth was far stronger than anticipated.

That had sparked a shift in expectations about U.K. interest rates, with investors raising bets on a hike as early as May. But the PMI survey -- which also showed softer price gains -- may somewhat temper that. The pound pared an advance after the report, giving up a 0.2 percent gain to trade little changed at $1.4120 as of 9:38 a.m. London.

“The January slowdown pushes the all-sector PMI into dovish territory,” said Chris Williamson, chief business economist at IHS Markit. “With the survey also indicating weaker upward price pressures, the data therefore cast doubts on any imminent rise in interest rates.”

Last month’s readings suggest the economy is running at a quarterly growth rate of just under 0.3 percent.

IHS Markit said the weakness in services was led by consumer- facing firms such as hotels and restaurants, and demand for transport and communication services fell. While confidence overall remained positive, some respondents said they were being “stymied by Brexit-related uncertainty,” and others noted a deterioration in productivity.

— With assistance by Harumi Ichikura, and Mark Evans

    Before it's here, it's on the Bloomberg Terminal.