Sluggish services sector rebound suggests economy remains subdued

UK services sector activity has recovered less heartily than hoped, as the first indications show April failed to recover the ground lost the previous month.

The services purchasing managers' index climbed to 52.8 in April from 51.7 a month earlier, according to the IHS Market survey, but this was short of estimates for around 53-53.5.

Following a weak manufacturing report and a limp recovery from construction earlier this week, the all-sector PMI index rose to 53.2 but failed to recoup the fall in March to 51.9 from 54.2 in February

The composite index was the second-weakest since the Brexit vote and indicates the economy is growing at a quarterly rate of around 0.2% at the start of the second quarter.

In the services sector, the modest recovery output was still only to the second softest level seen for just over a year-and-a-half, with subdued new business growth persisting as consumers remain fairly cautious on finances.

“The surveys have indicated that sales, investment and hiring are being hit by uncertainty about the economic outlook as well as sluggish domestic demand, notably among consumers," said IHS Markit economist Chris Williamson.

“The disappointing services data will add to expectations that the MPC will take its finger firmly off the rate hike trigger. Any further slowing will also raise questions as to whether the November rate hike may have been ill-timed.”

While Barclays, like many economists, had argued that soft data in the first quarter was mainly temporary, this week's PMI data and particularly the all-important services sector serves to contradict that.

Barclays said it was removing its call for a May interest rate hike, or indeed any hike this year. "We now believe that Bank rate will remain unchanged over the forecast horizon."

"Importantly, April’s PMI is adding evidence that the underlying growth trend is materially lower that the BoE thinks. It now seems highly unlikely that GDP growth in 2018 will be higher than 1.5%, let alone reach 1.8% as expected by the Bank."

Following BoE governor Mark Carney's comment in April of “a few interest rate rises over the next few years”, Barclays sees the Bank arguing at next week's meeting that the direction of travel is unchanged but "markets will likely think twice before taking this at face value given the quick turnaround in MPC communication".

Economists at the bank concluded: "It seems like a long time ago now when Markets were pricing a hike in May and a second in February [2019]."