UK services growth weakens

Britain's dominant service sector grew at a much weaker pace than expected last month despite firms cutting prices and running down existing orders, a business survey showed on Wednesday.

The latest round of gloomy data will solidify expectations the Bank of England will restart its printing presses and support the economy with another round of quantitative easing when it meets on Thursday.

The Markit/CIPS purchasing managers' index (PMI) for the services sector, which accounts for around three quarters of output, sank to an eight-month low of 51.3 in June, below May's 53.3 and well shy of expectations for a more moderate easing to 52.8.

A reading over 50 signals growth and the index has held above the break-even mark for 18 months but Markit said the latest figures suggest the sector grew by only 0.2 percent last quarter.

Worryingly for policymakers, once again some of that minimal growth was generated by fulfilling existing orders. The outstanding business index has been in contractionary territory for 14 of the last 15 months.

“The services economy saw one of its worst months since the recovery began three years ago, with the June survey showing signs of growth stalling. The services PMI probably cements the case for further stimulus from the BoE,” said Chris Williamson, chief economist at data compiler Markit.

The data comes after separate PMIs showed construction activity fell at its fastest pace in two-and-a-half years during June and that the manufacturing sector contracted for the second month running.

Markit said the June PMI surveys pointed to one of the weakest months in more than three years and suggested the British economy contracted 0.1 percent in the last quarter.

Britain fell back into recession at the start of the year and economists see tepid growth ahead at best, with only a small bounce from London's hosting of the Olympic Games, leading to calls for the government and BoE to act.

The Conservative-led coalition government, which has focused on cost-cutting to reduce a record budget deficit, has also introduced measures to get credit flowing through the economy and vowed to do more to boost house building and infrastructure spending, though many economists think proper fiscal stimulus might be needed.

Faced with a struggling economy the BoE is expected to flood markets with another 50 billion pounds of cash this week, on top of the 325 billion pounds it has already pumped in, as falling inflation gives it more room to manoeuvre.

PRICE PRESSURES

The PMI survey showed firms were forced to cut prices for the second month running to drum up business with the sub-index nudging up to 48.9 from May's 48.8. It has been below 50 for all but two of the last nine months.

The price cuts came despite input costs rising at a faster pace last month than they did in May.

With the slowdown becoming entrenched firms were less optimistic about the future and the business expectations index, while remaining positive, fell to a six-month low.

“A steep drop in service providers' expectations about the year ahead also casts a gloomy shadow on prospects for the sector in the short-term,” Williamson said.

Firms were concerned about the situation in Europe, Markit said, where a two-and-a-half year debt crisis shows little sign of abating anytime soon.

Earlier data from the 17-nation bloc showed its service sector contracted for the fifth straight month.

Regardless of their decreasing optimism businesses continued to take on more staff, though at a slower pace than in May. - Reuters