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Services sector slowdown: what the analysts say

With Britain’s services sector suffering its biggest slowdown in a decade, economists believe some Bank of England policymakers will now push for more quantitative easing

Teodor Todorov, economist at the Centre for Economics and Business Research

Today’s numbers will do nothing to lift some of the gloom about the UK economy that has accumulated over the last month. With the manufacturing-led recovery losing steam, Monday’s weak data suggest that the slowdown in the economy is affecting all sectors. The contraction in employment figures in services and manufacturing provide more evidence that the labour market recovery is grinding to a halt, and this will put increasing pressure on George Osborne to do more on jobs, especially following last week’s abysmal labour market data for the US, which sent stock markets plummeting again.

With input prices starting to level off, business activity across all sectors contracting, and the fiscal measures set to intensify, the Bank of England will find it increasingly hard to ignore calls for more quantitative easing despite CPI inflation way above target. We expect at least three members of the monetary policy committee to vote in favour of quantitative easing at the September meeting.

Howard Archer, chief UK economist at IHS Global Insight

This survey really rings the growth alarm bells. The very sharp slowdown in activity in the services sector in August indicated by the purchasing managers’ survey is a particularly significant blow to the economy given the sector’s dominant role. Even allowing for any impact from the riots and a correction after a surprise spike up in services activity in July, this is a hugely disappointing survey. The only crumb of comfort is that it shows services activity is still expanding.

It is not just that business activity expansion fell sharply to a 2011-low in August but also that incoming new business moderated, backlogs of work contracted, employment fell and business expectations sank to a 13-month low.

The survey strongly reinforces belief that interest rates are staying down at 0.50% for a long time to come, and fuels expectations that the Bank of England will enact further quantitative easing. However, we believe that further quantitative easing still seems unlikely as soon as this Thursday given still significant near-term inflation concerns.

Ross Walker, economist at Royal Bank of Scotland

This level is still consistent with growth but at half its long-run trend. Most people had been surprised by the rise in July and expected a reversal, but not this size. It’s bad and it’s worse than expected, and I think there has been some underlying deterioration.

Historically this has been an important indicator for the Bank of England, so it certainly helps nudge them that way [towards QE]. I’m not convinced we’re going to see a policy change this month, but November certainly becomes quite interesting. A lot will depend on financial market conditions.

Alan Clarke at Scotia Capital

Given the dive in survey indicators in continental Europe and against a backdrop of the dive in the FTSE it should come as no surprise that this survey fell to this extent.

In tandem with its manufacturing sector sibling, that took the composite CIPS down to 50.5 – the lowest since mid-2009. At face value that is still above 50 – in theory consistent with expansion. However, in practice, the relationship with GDP points to contraction – somewhere in the region of -0.25% to -0.5% quarter on quarter. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds