The CIPS report, sponsored by Reuters, increased speculation the Bank of England might even cut interest rates by half a point to 5.0 percent when it meets next week, economists said, despite a strong house price report from the country's biggest home loan lender, the Halifax. One fifth of all companies reported activity levels lower than in March, the CIPS said, causing its business activity index to fall sharply to 51.2 from 55.7 in March. That was the worst figure since February 1999's 49.5. Any reading above 50 signals expansion, below 50 contraction. The survey is closely watched as a leading indicator of swings in economic output and tends to be more timely than official data.
Services account for over two thirds of the economy and dwarf manufacturing.
Confidence within the sector waned, with the business confidence index tumbling to its weakest since December 1998, reflecting increased fears of weaker UK growth linked to the U.S. economic slowdown. The incoming new business index hit its lowest since February 1999 at 51.1. There are two main factors here. Britain's economy expanded just 0.3 percent in the first quarter of this year compared with the final quarter of 2000, raising concern that the economy is facing a sharp slowdown unless interest rates are cut aggressively this year. That slowdown, combined with low inflation, explains why the Bank of England has cut interest rates twice this year and will probably reduce them again next week from the current 5.5 percent level.