LONDON (Reuters) - Britain’s services sector struggled to recover in April from a sharp slowdown in March, according to a major survey which seals expectations that the Bank of England is now highly unlikely to raise interest rates rise next week.
The IHS Markit/CIPS services purchasing managers’ index (PMI) rose to 52.8 in April from March’s 20-month low of 51.7, a smaller increase than economists had forecast in a Reuters poll and its second-lowest level since September 2016.
Sterling fell and British government bonds rose as investors modestly marked down the chances of a rate rise on May 10, which now hover near 15 percent according to one measure.
Britain’s economy, which has underperformed its peers for most of the period since the 2016 Brexit vote, grew by just 0.1 percent in the first three months of 2018, its weakest in five years, due in part to heavy snow in late February and early March.
But since then business surveys have recovered less than expected and BoE Governor Mark Carney has suggested the central bank could wait before raising rates for only the second time since the 2008-09 financial crisis, causing a sharp shift in financial markets away from bets on a rate hike next week.
“The disappointing services data will add to expectations that the Monetary Policy Committee will take its finger firmly off the rate hike trigger,” IHS Markit economist Chris Williamson said. “Any further slowing will also raise questions as to whether the November rate hike may have been ill-timed.”
Business said they were hurt both by weaker demand from consumers, whose budgets have been squeezed by a year of above-target inflation, and by the reluctance of corporate clients to spend due to an uncertain economic outlook.
Terms for Britain’s departure from the European Union in less than a year remain unclear, and the euro zone economy slowed in the first three months of 2018.
Britain’s smaller construction sector - the part of the economy most directly hurt by the harsh weather - showed a rebound last month, according to an IHS Markit survey published on Wednesday.
But April’s recovery in the manufacturing sector was muted and IHS Markit said the PMI data overall suggested Britain’s economy was growing at a quarterly rate of 0.25 percent, well below its long-run trend.
“These figures suggest that factors such as the continued uncertainty around the UK’s future trading relationships outweigh the impact of poor weather,” said Chris Sood-Nicholls, a managing director at Lloyds Bank’s business banking unit.
A separate survey by the Confederation of British Industry, also released on Thursday, showed small manufacturers reported the fastest growth in export orders on record.
But concern about Brexit and the economic outlook made them unwilling to invest in more capacity, despite a lack of machinery limiting production, the CBI said.
The sluggish PMI growth data contrasted with more upbeat figures on jobs and wages earlier in the year that prompted two BoE policymakers to vote for a rate rise in March.
Unemployment in the three months to February was the lowest since 1975 and wage growth has picked up, though some economists expect it will fizzle out, as has happened in past years.
IHS Markit said a rise in the minimum wage in April and employer pension contributions pushed up costs for businesses.
Hiring among services firms was the slowest in over a year. Some said they could not replace staff who left due to a lack of qualified applicants. Others said higher employment costs meant they were seeking to squeeze more from existing staff.
Passing higher costs on to consumers was getting harder, firms said, as they raised prices at the joint-slowest rate since July.
The survey gave a mixed view of the future. Business confidence was the highest since January, but the inflow of new orders was the second-weakest since August 2016.
Editing by Hugh Lawson