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UK services growth weakest in nearly two years UK service sector falters
(35 minutes later)
Business in Britain's dominant service sector grew at the slowest pace in almost two years in October and optimism about the outlook waned, a survey showed on Monday, pointing to a fragile economic recovery. Britain's services sector almost ground to a standstill last month, dampening hopes that the economy is on the road to recovery.
Combined with a deeper contraction in manufacturing, the data contrasts with the strong economic expansion in the third quarter and recent upbeat retail figures and may make the Bank of England's monetary policy decision next week a close call. The Markit/CIPS Purchasing Managers' Index (PMI) for the dominant services sector dropped to 50.6 last month from 52.2 in September, only just above the 50 mark that separates growth from contraction. It is the slowest pace of growth in almost two years and way below analyst expectations of a much smaller decline to 52.
The main Markit/CIPS Purchasing Managers' Index (PMI) for the service sector, measuring the change in business activity including income and chargeable hours worked, fell to 50.6 last month from 52.2 in September, holding just above the 50 line that separates growth from contraction. The UK economy grew by 1% in the third quarter, pulling the UK out of the longest double-dip recession since the second world war. But economists warned that the figures were helped by a boost from the Olympics and a rebound from lost output as a result of the Jubilee weekend.
It was the lowest reading since December 2010 and fell short of analysts' forecasts for a smaller dip to 52.0. Andrew Harker, economist at Markit, said: "The latest UK services PMI data provide a warning to those who saw the strong growth in GDP during the third quarter as symbolising the start of a strong and speedy economic recovery. Although there are signs of improvements, [companies surveyed] still referred to the fragility of both demand and confidence among clients. The expectation among firms is for activity to improve over the coming year, but the road to full economic recovery still looks to be a long one."
"The broadly stagnant trend seen in official data over the year to date looks to have continued at the start of the fourth quarter," said Andrew Harker, economist at Markit, which compiles the survey. Some economists said the release pointed towards the UK economy shrinking again in the fourth quarter, raising the prospect of a triple-dip recession. Rob Wood at Berenberg Bank said: "With manufacturing output suffering from weak exports and domestic demand and the service sector flirting with contraction, a fall in GDP in the fourth quarter now looks most likely."
"The expectation among firms is for activity to improve over the coming year, but the road to full economic recovery still looks to be a long one," he added. The data will reignite the debate over whether the Bank of England will expand the quantitative easing programme this week. Howard Archer of IHS Global Insight said: "While we just about still lean towards the view that the Bank of England will hold off from more QE for now and monitor how the economy is developing and what impact the Funding for Lending Scheme is having, it is looking an extremely tight call."
Business sentiment remained solid, albeit at its weakest since June, with 42% of respondents forecasting a rise in activity compared with the 11% who predicted a decline. While new orders in the services sector did grow in October – largely due to overseas demand – they did so at a slower pace than in September and companies said incoming new business did not make up for the completion of existing projects.
After news last month that the economy grew by 1% from July to September, many economists revised their forecasts for the central bank's announcement on Thursday, expecting no extension of its government bond purchases for now. For the second month running, service companies cut jobs in October. Archer said: "A second successive, albeit modest, drop in services employment in October is a warning sign that there is no guarantee that the recent remarkable resilience of the labour market can be sustained."
However, many service providers said improvements in demand and their clients' confidence were only tentative, and growth in new business slowed slightly. Companies reported rising costs but were reluctant to pass them on to customers as a result of strong competition. They did, however, say they remained optimistic that service sector activity will improve over the coming 12 months, with 42% of those surveyed forecasting higher activity over the coming year.
There was also evidence of pressure on firms' profit margins as their costs rose more than the prices they charged, with increases in energy, food and fuel costs as well as wages.
Firms reduced their headcount for the second month running in October, although by less than in September.
A PMI survey last week showed that the British construction sector, which has been the main drag on the economy this year, eked out growth in October, but new work and employment shrank and builders remained cautious about future business.
Markit's composite index, which brings together all three business sectors – services, manufacturing and construction – fell to the weakest level since July when Britain had just exited recession.
The services survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants, but excludes the retail sector.