Worries about the EU referendum, turmoil on financial markets and a faltering global recovery all took their toll on confidence among the UK’s services businesses and knocked their growth to a three-year low, according to a closely watched survey.
As interest rates mark their seventh anniversary at the historic low of 0.5% this week, the figures will reassure Bank of England policymakers that they can keep borrowing costs low without fearing a rapid pick-up in inflation. Some economists have even raised the idea of interest rates being cut closer to zero, something the Bank’s governor, Mark Carney, has conceded is an option.
The services snapshot showed business activity and new work in the UK’s biggest sector, which covers hairdressers to shops and insurers, expanded at the slowest rate since March 2013 when there were fears a fragile economy was about to slip into recession.
The report, compiled by data company Markit, chimed with similarly downbeat polls on the UK’s smaller construction and manufacturing sectors earlier this week. Taken together, they pointed to a slowdown in GDP growth and were in territory normally consistent with the Bank cutting interest rates rather than raising them, said Markit’s chief economist, Chris Williamson.
“The extent of the slowdown will be a shock to policymakers and surely puts to bed any talk of the Bank of England raising interest rates. The focus will instead increasingly shift to whether policymakers may soon need to dig deeper into their toolbox to introduce new measures to shore up the economy with additional stimulus, and what tools might be used,” he said.
The survey’s headline measure of activity fell to 52.7 in February, from 55.6 in January. That was still above the 50 mark that separates growth from contraction but well below expectations for a reading of 55.1 in a Reuters poll of economists.
That downbeat picture mirrored gloomy growth reports from services companies in China, the US and the eurozone, and underscored fears that demand is waning around the world.
Companies in the UK had reported that rising levels of global economic uncertainty had resulted in delays in clients placing new orders, according to Markit.
It also cited faltering confidence due to the looming EU referendum on 23 June and noted employment growth slumped to its weakest level in two and a half years in February, according to the Markit/CIPS UK Services PMI report.
“Survey responses reveal that firms are worried about signs of faltering demand, but boardrooms have also become unsettled by concerns regarding the increased risk of Brexit, financial market volatility and weak economic growth at home and abroad,” said Williamson.
Investment bank JP Morgan said the services data had prompted it to push back its forecast for an interest rate rise from the final quarter of this year to the first quarter of 2017.
“The timing of this call depends a lot more on two great uncertainties this year: 1) the possibility of Brexit and 2) downside risks to the global outlook,” said Allan Monks, an economist at JP Morgan.
The prospect of low borrowing costs for longer will be welcomed by mortgage holders but will disappoint savers. Analysis by Hargreaves Lansdown suggested seven years of quantitative easing (QE) and record low rates had cost savers an estimated £160bn.
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