Service sector data at odds with slowdown

Despite weaker-than-expected industrial production in September, renewed buoyancy in the service sector has put pressure on the Bank of England's policy-makers to increase interest rates. Tom Stevenson, Financial Editor, reports on the latest batch of statistics.

Further evidence of Britain's two-speed economy emerged yesterday after the September data for both industrial and manufacturing production were weaker than expected but October numbers for the service sector rose to their highest level since July.

Economists said that because the service sector was three times bigger than the manufacturing side of the economy and because it had been the main driving force of GDP growth this year, any further acceleration in services would have to be met by higher interest rates.

The Bank of England's Monetary Policy Committee concludes its monthly meeting today and is expected to leave interest rates unchanged. Some economists believe, however, that the apparent slowing in the economy might simply be a pause before growth resurges and they expect at least another quarter-point rise in base rates from the current 7 per cent before the cycle peaks.

According to the latest survey of members of the Chartered Institute of Purchasing and Supply (Cips), all measures of business activity - new business, outstanding work, prices and input costs - rose in October. The survey showed recruitment difficulties were putting upward pressure on wages in some sectors. Strong competition means those higher costs are not being passed on to consumers, which is keeping a lid on service sector inflation. But the MPC is expected to be concerned about the upward pressure on wages.

Peter Thomson, director general of Cips, said: "The service sector economy has picked up since the weaker growth over the summer, though expansion is not as strong as it was in the first six months of the year. Skill shortages continue to drive up costs by pushing up salaries, but the outlook for inflation remains favourable."

According to Kevin Darlington, economist at Hoare Govett, there has been a worrying extension of tightness in the labour market from skilled jobs to low-skilled vacancies. He believes the figures show a slowdown in service industries is not imminent.

Industrial production fell by 0.2 per cent in September thanks largely to erratic oil and utilities output. Oil and gas production fell by 1.6 per cent while electricity and water supply industries fell by 2.4 per cent. Even so, the underlying picture for the predominant manufacturing sector was disappointing.

The rise in September for manufacturing was only 0.2 per cent. It failed to make up for the fall in August, which was revised up from 0.1 per cent to 0.3 per cent. As a result, the year-on-year growth in manufacturing was only 1.5 per cent.

According to Jonathan Loynes, economist at HSBC Markets, however, manufacturing output during the three months to September showed a "reasonable recovery". He said: "With today's purchasing managers' report showing continued above- trend growth in the services sector, the numbers together support the idea that interest rates have a little further to rise before reaching a peak."