Services slowdown fuels clamour for rate cut

THE Monetary Policy Committee (MPC) is under renewed pressure to deliver significant cuts in UK interest rates later today after a new survey revealed clear evidence of a slowdown in the services sector.

Some economists speculated that the services sector could be heading for recession after the Chartered Institute of Purchasing and Supply (CIPS) said new business in the sector had fallen for the first time since its survey began two years ago.

Services continued to grow in October, according to the CIPS, albeit at a markedly lower rate than in September.

The CIPS index of business activity fell to 52.1 last month, down from 54 in September. A reading of more than 50 means the sector is expanding.

David Hiller of Barclays Capital said: "The survey suggests activity in the services sector will only grow for another month or so. After that activity will fall and the economy will move into recession."

Economists at ABN Amro said: "The economic slowdown is clearly extending to services. If the MPC needs another trigger for a rate cut, this is it."

The Chancellor's revisions to his growth forecasts in Tuesday's pre-Budget statement also intensified pressure on the MPC, said several City experts. Gordon Brown said the UK economy would grow by between 1 and 1.5 per cent in 1999, but would rebound quickly to grow by between 2.75 per cent and 3.25 per cent in 2001.

Economists said these projections - which many in the City believe are over-optimistic - could only be achieved if there were substantial cuts in UK interest rates.

Neil Parker at Royal Bank of Scotland said: "Of surprise was how modest the revisions were and the speed at which the economy is forecast to rebound. Is the Treasury anticipating dramatic rate cuts from the Bank?"

The Bank of England's MPC announces its interest-rate decision at midday today. Most economists believe there will be a 0.25-point cut in rates, with a significant minority predicting that the MPC will cut rates by half a point.

As independent experts examined Tuesday's pre-Budget statement, doubts emerged over the Government's measure of the productivity gap as well as the forecasts for growth and the public finances.

The Institute for Fiscal Studies (IFS), one of the UK's leading research institutes, said the Government's key measure of productivity - output per worker - could overstate the productivity gap between the UK and the US up to 33 per cent.

Output per worker fails to adjust for hours worked, said Rachel Griffiths of the IFS: nor does it take into account part-time workers or capital inputs such as technology.

An alternative method of measuring productivity - so-called total factor productivity - reveals that the US is only 7 per cent more productive than the UK. The output per worker measure estimates this productivity gap at 40 per cent.

Andrew Dilnot, IFS director, said the Government's forecasts for the public finances were "almost certain" to be wrong. He said it was important for the Chancellor to work out what he would do if his predictions were forced off track.

Most economists believe Mr Brown's public finance predictions to be over- optimistic, but only a minority believe he will have to break his "golden rule" of only borrowing to invest.