Services sector growth slumps to 5- year low

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By Grainne Gilmore

The credit crunch began to impact the wider economy last month as growth in Britain's services sector, which includes hotels, restaurants and banks, fell to a five-year low.

Figures out today from the Chartered Institute of Purchasing and Supply’s purchasing managers’ index (PMI) show that growth in what accounts for about two thirds of the whole economy, slowed from 52.1 in March to 50.4 in April.

Any figure over 50 indicates expansion.

Price pressures on firms rose to a record high, with 67.3 per cent of purchasing managers reporting that prices rose rather than fell in April, up from 66.2 in March and the highest figure since records began in 1996.

Expectations of businesses also plummeted, to the lowest level since the terrorist attacks in 2001.

Hotels and restaurants were particularly pessimistic, reporting that customers were reducing their spending.

However there was some good news for consumers as the balance of companies reporting increases to their own prices rose at the slowest rate so far this year. A balance of 55.2 companies reported that they were increasing their prices in April, down from 56.2 in March.

Roy Ayliffe, the director of professional practice at CIPS, said: “Purchasing managers in the UK services sector really struggled to protect their firms’ margins in April, as growth in the sector hit its lowest in over five years. New orders fell; energy, fuel and food costs soared and pricing power was restricted amid further deteriorating economic conditions.

"These factors led to a depression in business confidence, particularly amongst hotels and restaurants, which were hit by customers' reduced spend, as well as financial services companies, who have obviously been most directly affected by the credit crunch.”

There was some consolation for the MPC in the employment data from the index. Karen Ward of HSBC said: "Looking on the bright side there is some good news. Firms may not be expanding employment but are not yet shedding labour."

Some experts say that the new data will add pressure on the Bank of England's Monetary Policy Committee to cut rates on Thursday.

Howard Archer, of Global Insight, the economic consultancy, said: "Following on from recent weaker data and surveys relating to consumer confidence, retail sales, the housing market and manufacturing activity, essentially stagnant service sector activity in April puts serious pressure on the Bank of England to cut interest rates again on Thursday despite current elevated inflation concerns."