Service sector 'facing tricky recovery'

Restaurants and hotels are still struggling

The UK's service sector remains under pressure and the economy may need a further cut in interest rates to stimulate growth, according to the findings of two surveys.

Consumer service firms are facing a "tortuous recovery" according to the latest quarterly study from the CBI and Grant Thornton.

Meanwhile a separate survey from BDO Stoy Hayward found the consumer slowdown was hitting firms hard and urged a quarter point cut in UK rates.

The Bank of England's rate-setting committee meets this week and will announce on Thursday whether it is changing rates from their current level of 3.75%.

No post-war rebound

The CBI's latest snap-shot of sentiment in the service sector found businesses such as hotels and restaurants reporting the fastest decline in business volumes for a year.

The 'Baghdad bounce' many commentators were predicting... simply hasn't materialised, suggesting a tortuous and protracted recovery

Scott Barnes, Grant Thornton

The findings are especially worrying as the survey was carried out after the end of the war in Iraq.

However, the study did find that optimism was holding up among business and professional firms, despite an expected pick-up in business failing to materialise.

"The service sector is not all doom and gloom but there is no denying that within it, consumer services firms are struggling and giving cause for concern," said Scott Barnes of Grant Thornton.

"The 'Baghdad bounce' many commentators were predicting, following the successful end to the Iraq conflict, simply hasn't materialised, suggesting a tortuous and protracted recovery, which will, at best, be showing some results in 2004.

"The pound's more competitive value relative to the euro is likely to boost British exports but if a more widespread recovery is to be stimulated, a further reduction in interest rates may be necessary."

'Decisive action' needed

The study from BDO Stoy Hayward echoed the CBI report in that it found output in the service sector falling.

There was some good news for the beleaguered manufacturing sector though, with the output index for the sector showing a slight rise as the weaker pound helped to boost order books.

Peter Hemington, partner at BDO Stoy Hayward said: "In the aftermath of the war in Iraq, we are seeing static business confidence with expectations for growth extremely downbeat.

"As a result, we hope to see the MPC take decisive action to boost the economy by cutting interest rates by 0.25% this week."