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Friday, 3 August, 2001, 11:03 GMT 12:03 UK
Gloom spreads to UK service sector
Call centre worker
Call centres are among the sector's biggest employers
A new survey has given the clearest indication yet that the slowdown in UK manufacturing is spreading to the service sector.

The UK service sector is surprisingly weak and certainly helps to explain the Bank of England's shock rate cut yesterday

Jeremy Hawkins
Bank of America

The Chartered Institute of Purchasing and Supply (CIPS) found that activity in the service sector fell to a seasonally adjusted 50.3 in July, just above the 50.0 no-change mark.

This level of activity, which is measured by the CIPS service sector business activity index, follows an unrevised score of 52.1 during the previous month.

The findings will help justify the Bank of England's surprise decision on Thursday to shave 0.25% off interest rates despite a booming housing market and buoyant retail sales.

Although the CIPS index showed demand for services grew in July for the 29th consecutive month, there was a marked slowdown in the amount of new orders.


There was also a sharp fall in outstanding business, with the backlog of work falling steeply across all sectors except IT and computing.

The sharpest fall was in hotels and catering.

Additionally, there was no growth in service sector employment for the second consecutive month.

Just 13% of firms surveyed reported that they were recruiting staff during July.

Many firms reporting a growth in new business put it down to an increase in sales and marketing activities.

'Surprisingly weak'

Reacting to the CIPS survey, Jeremy Hawkins of the Bank of America, said: "The UK service sector is surprisingly weak and certainly helps to explain the Bank of England's shock rate cut yesterday.

"About the only good news in the report is the employment index holding above the key 50.0 mark, but outside of this it makes pretty depressing reading.

"Even expectations have fallen to their lowest level since December 1998.

"If the global deterioration really is impacting the service side of the economy as much as this suggests, another rate cut may not be far away.

"Certainly it is hard to see the consumer sector supporting the domestic economy itself."

Slow growth

Arjun Mittal of American Express, said he was disappointed but not surprised by the CIPS survey and remained optimistic about the UK economy as a whole.

I don't see the UK going into recession, rather a US style of very slow growth

Arjun Mittal
American Express
"I don't see the UK going into recession, rather a US style of very slow growth," he said.

"The outlook really depends on what happens in the global economy, particularly in the US.

"The UK services sector seems to have been brought down by the weakness in manufacturing at the moment.

"In manufacturing the UK really is only going to pick up if the US does.

"Our in-house view is that we expect the US to be close to the bottom and to pick up, so [we're] hoping this is the bottom of the UK services CIPS number."


The CIPS survey showed stagnation in prices charged by service sector companies.

But there was a robust increase in costs, with wage inflation being mentioned by many companies, as well as rising fuel prices.

However, the survey also showed high levels of optimism among some service sector companies.

More than half of the survey panel said they expected their activity levels to be higher in a year's time.

However, in many cases this was based on hopes that the general business environment would be better.

Overall, service sector optimism in July was at its lowest since December 1998.

The BBC's Navdip Dhariwal
"The fear is that public sector workers will be hardest hit"
See also:

30 Jul 01 | Business
Consumer credit boom continues
02 Aug 01 | Business
US factories struggle for trade
30 Jul 01 | Business
Profit warnings set to increase
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