U.K. service sector growth remains lacklustre in June

Growth not strong enough to generate jobs

(Reuters) — Britain’s service sector performed better than expected in June but growth was still not strong enough to generate jobs, a purchasing managers’ survey showed on Tuesday.

The Markit Purchasing Managers’ Index (PMI) nudged up to 53.9 last month from a three-month low of 53.8 in May. That was above the 53.5 that economists had forecast, and gave a boost to the British pound.

But it remains below its long-run average, and Markit said the economy was likely to have expanded by 0.3 per cent over the second quarter at best.

“It was a relief that it wasn’t weaker, but that's not to say it’s a particularly great outcome,” said Alan Clarke, economist at Scotia Capital. “We really need to see the PMIs bouncing back now or we’re talking about GDP growth this year of one per cent or lower.”

After contracting at the end of last year, Britain’s recovery has struggled to gain traction. Massive public spending cuts have led to a big drop in consumer and business confidence and banks remain reluctant to lend.

The details of the PMI survey painted a subdued picture. Employment was static, as it has been for the past year, new business growth slowed and confidence slipped to its lowest since October.

The only bright spot was on the inflation front. Input prices and prices charged both rose at their slowest pace this year, providing hope that inflation in the broader economy will start to ease.

Inflation is currently running at 4.5 per cent, more than double the Bank of England’s target, but the central bank is reluctant to raise rates for fear of snuffing out the recovery. Interest rates have stood at a record low 0.5 per cent for more than two years and markets are not pricing in any rise until 2012.

Britain’s economy expanded by 0.5 per cent in the first three months of the year, a disappointing performance that only made up for the drop in the final three months of 2010.

Howard Archer at IHS Global Insight said the services survey did little to boost hopes that the economy was coming out of its soft patch.

“A second successive modest slowdown in new business growth in June and a falling back in business expectations to an eight-month low hardly inspires confidence that the services sector activity is going to pick up markedly in the near term at least,” he said.

Latest stories