U.K. Services Disappoint as Economy Stays Stuck in Slow Lane

(Bloomberg) -- The U.K.'s dominant service sector grew at a slower-than-expected pace in April, raising further questions about the underlying strength of the British economy.

IHS Markit said its Purchasing Managers Index for the industry saw only a modest rebound from the 20-month low posted in March, with the reading of 52.8 the second weakest since September 2016. In a separate report on Thursday, the European Commission predicted that the U.K. will continue to lag growth in the euro area and the U.S. for the next two years.

Based on the three industry surveys for April, Markit estimates an expansion consistent with a “disappointingly subdued” quarterly rate of 0.25 percent. While that would be an improvement on the 0.1 percent seen in the first quarter, when heavy snowfall hampered activity, it's considerably slower than the growth seen in the second half of 2017. Markit said consumers showed a reluctance to open their wallets in April, while concerns about the domestic outlook crimped spending by companies.

The report adds to signs that the Bank of England's Monetary Policy Committee, which raised interest rates for the first time in a decade last year, will refrain from a follow-up increase when they meet next week. Such a move was seen as a near certainty by investors until a few weeks ago, but those bets were reversed after a raft of poor data.

Traders cut bets on a hike further on Thursday, with the implied probability of an increase dropping below 10 percent. That's down from more than 90 percent at the end of March. The pound also pared an advance against the dollar, while U.K. government bonds erased earlier losses.

Further Deterioration

The surveys “suggest that the underlying performance of the economy has continued to deteriorate,” said Chris Williamson, chief business economist at IHS Markit. “The disappointing services data will add to expectations that the MPC will take its finger firmly off the rate-hike trigger.”

While European Commission estimates for U.K. growth in 2018 and 2019 were upgraded slightly, to 1.5 percent and 1.2 percent, they remain worse than for all the remaining European Union countries bar Italy, which has the same outlook. The U.S. is seen growing at 2.9 percent this year, and the forecast for the euro area is 2.3 percent.

The EU also predicted that the U.K. would be bottom of the pile for investment growth, while inflation would drop to below the BOE's 2 percent target in 2019. The forecasts are based on the assumption that the trading relationship with the EU will remain unchanged when the U.K. leaves the bloc.

November Hike Questioned

Markit's services index was slightly higher than the 51.7 recorded in March but below the 53.5 seen by economists in a Bloomberg News survey. The firm said that the rate of service-sector employment growth slowed to its weakest since March 2017 last month, and higher salary payments push up costs.

The figures follow reports earlier this week showing an index for the manufacturing industry fell to a 17-month low last month and the construction sector rebounded.

“Jobs growth across services, manufacturing and construction has slowed to its weakest since the referendum and inflationary pressures have eased,” Williamson said. “Any further slowing will raise questions as to whether the November rate hike may have been ill-timed.”

--With assistance from Harumi Ichikura

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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