UK services growth unexpectedly slows in January but still solid

Wednesday 05 February 2014 18.31
Markit's UK services purchasing managers' index eased to 58.3 in January from 58.8 in December
Markit's UK services purchasing managers' index eased to 58.3 in January from 58.8 in December

Growth in Britain's dominant service sector slowed unexpectedly in January but activity remained strong.

The new data suggest the economy is picking up speed in the first quarter of 2014.

A survey by data company Markit also showed a pick-up in price pressures for service firms but not to a level that would suggest a problem for the Bank of England, which has stressed it is in no hurry to raise interest rates.

Markit's services purchasing managers' index (PMI) eased to 58.3 in January - its lowest since June - from 58.8 in December.

It was also lower than the 59 reading expected in a Reuters survey.

However, the figure remained well above the 50 mark that separates growth from contraction, and business confidence was at its highest in nearly four years, bolstered by outstanding business which reached its highest since May 1997.

The survey showed the service sector, which makes up more than three-quarters of Britain's GDP, remained an important engine of growth at the start of the year after the economy in 2013 posted its fastest expansion since the financial crisis.

"Even with the easing seen in January, the sector is still expanding at a rate that bodes well for another strong GDP reading in the first quarter," said Chris Williamson, chief economist at Markit.

Similar surveys this week showed Britain's rebound was being supported by other sectors, with construction activity growing at its fastest pace in six and a half years and manufacturing growth easing in January but still firm. 

The composite index of the three PMIs fell to 59.1 in January - its lowest since June but still some way off the 50 mark - from 59.4 in December, Markit said.

Williamson said the three PMI surveys suggested Britain was on course for quarterly GDP growth of 0.8% in the first three months of 2014, an improvement from a preliminary reading of 0.7% in the fourth quarter of 2013.

Britain's economy had one of the fastest recoveries among industrialised nations last year but growth has largely been driven by household spending - a trend which the Bank of England wants to see balanced by stronger exports and more business investment.

The business expectations index for the service sector rose to its highest since March 2010. Markit said that to meet expected demand companies are planning more recruitment and investment.

Indeed, an index of growth in employment in the services, manufacturing and construction sectors together rose to 55.6 in January, its highest since October and matching its highest level on record, from 55.2 in December, Markit said.

This could push the jobless rate closer to the Bank of England's 7% threshold at which it will review interest rates faster. Still, it is already very close to that level and policymakers have said rate hikes are not imminent.

"Employment growth has also accelerated again at the start of the year, as increasing numbers of firms gain confidence in the economic outlook," Williamson added.

"However, the survey also suggest that inflationary pressures and wage growth remain muted, which provides policymakers with extra leeway to keep policy loose for longer while the economy continues its recovery."

The index for input prices in the services sector rose to 57.3 from 55.9 in December, but Williamson said worrying levels would be above 60.

Bank of England policy makers begin a monthly two-day meeting today. They are expected to leave interest rates at their record low of 0.5% when they announce their decision tomorrow.