The Bank of England�s Monetary Policy Committee is expected to cut base rates by a full percentage point today after a closely watched survey showed the services sector contracted at its fastest rate in 12 years.
The Bank of England's Monetary Policy Committee is expected to cut base rates by a full percentage point today after a closely watched survey showed the services sector - the powerhouse of the UK economy - contracted at its fastest rate in 12 years.
The Monthly Services Purchasing Managers Index from the Chartered Institute of Purchasing and Supply, published yesterday, dropped to 40.1 in November from 42.4 the previous month.
November's reading was the lowest since the survey began in 1996. A reading below 50 indicates contraction, and the lower the number below 50 the greater the contraction.
The survey will make for grim reading for the Bank of England's rate-setters, who began their two-day interest rate deliberations yesterday, The services sector accounts for around two-thirds of Britain's gross domestic product.
"This is a desperately worrying survey given the importance of the dominant service sector to the UK economy," said Howard Archer, chief UK and European economist for IHS Global Insight.
He said the CIPS report and other data out this week point to deepening contraction in economic activity as well as rapidly diminishing inflationary pressures. He added: "Meanwhile, credit conditions remain very tight, Consequently, there is a compelling case for the Bank of England to cut interest rates by 100 basis points from 3% to 2%, and this is what we expect the MPC to deliver."
David Page, an economist at Investec Securities, predicted that the Bank of England will eventually bring the cost of borrowing to zero. He said: "We're seeing a very sharp contraction in the UK economy.
"There's a real risk that the Bank of England will go to effectively zero, perhaps around half a percent."
Further evidence of the scale of the downturn emerged with the news that consumer confidence continued to slide in November.
The Nationwide Building Society said almost half of the respondents to its monthly survey expected the economy to worsen over the next six months. Its consumer confidence index dropped to 50, down from 56 in October.
"Reports of job cuts have almost certainly impacted on sentiment about the present and future employment situation, causing purse strings to tighten further, even as the festive season gets under way," said Fionnuala Earley, Nationwide's chief economist.
It remains to be seen, she added, whether recent moves by the government, including a cut in VAT, will lift confidence.
Evidence yesterday of easing UK inflationary pressures suggested the Bank has room for a sharp cut, with the British Retail Consortium reporting a drop in annual shop price inflation to 2.7% in November from October's 3%.
The run of gloomy data this week, which started with dismal manufacturing data on Monday, has fueled expectations that the MPC will lower its rate to 2%. In November, it cut rates by a startling 1.5 percentage points, its biggest cut in 27 years.
Page's colleague, Philip Shaw, chief UK economist at Investec, said yesterday's "desperate" services sector PMI figures were enough for him to change his view on rates.
He now expects the Bank of England to deliver another full percentage point interest rate reduction instead of only half a percent. "In addition to changing our central case, we also recognise that there is a real chance of a repeat of last month's 1.5 percentage point cut," said Shaw.
At its last meeting on November 6, the nine rate-setters considered cutting by more than two percentage points but held back for fear of creating panic in markets, particularly the currency exchanges.
Since then, both the government and the Bank of England have warned that the economy will contract by more than 1% in 2009 and that deflation could be a bigger threat than inflation in the coming months.
New Star Asset Management, a leading investment fund, said yesterday that the British economy will slide into a trough in the second quarter of next year and bump along the bottom before recovering in the second quarter of 2010.
New Star economist Simon Ward's assessment of the economy is more pessimistic than that of the Bank of England, which expects a recovery starting in the third quarter of next year.
l In Ireland, the services economy shrank last month at the fastest pace in more than eight years as recession in the former "Celtic Tiger" and a global downturn continued to take its toll on demand in the sector.
The headline gauge of the NCB Purchasing Managers Index fell in November to 32.6 from 36.1 the month before, marking a contraction for the tenth straight month.
"Anecdotal evidence suggested that the principal cause of the latest reduction in activity were conditions in the wider Irish economy where the economic downturn has led to a steep fall in new business," said Brian Devine, economist at NCB Stockbrokers.
A collapse in the once-thriving property market and global market turmoil made Ireland the first eurozone country this year to slide into recession, ending more than a decade of economic boom. The business confidence index fell to 43.6 in November from 46.0 in October, with greater gloom on prospects in the coming months.
"Irish service providers were more pessimistic in November than at any other time in the survey's history," said a spokesperson for Markit, which compiles the survey of 600 Irish companies. The employment and new business components of the index also slid to new all-time lows due to falling demand, leading to job cuts.
"Panellists largely attributed negativity to the weak global economic climate, with many companies expecting the downturn in Ireland to intensify during 2009," the spokesperson said.
Markit added that companies were concerned that clients would reduce their expenditure over the next year, leading to a fall in sales volumes.
"More than two-fifths of respondents indicated that they expect their activity to be lower in 12 months' time," Markit said.
