Britain's dominant services sector suffered its first contraction in 20 months in December, sparking concerns about the resilience of the economic recovery.
Service companies, which account for three quarters of national output, last month sold less and cut staff, according to the closely-watched Markit/CIPS purchasing managers index (PMI). Following a similar dip in construction output, experts said the UK economy appeared to have shrunk again in December.
Economists were quick to dismiss fears of a double-dip recession, however, pointing out that the services industry would have been particularly susceptible to December’s Arctic weather. The poor figures, though, took the gloss off strong manufacturing data earlier in the week, which showed that factories are growing at their fastest pace in 16 years.
“It seems that the two speed economy is back, but one where manufacturing and services have swapped positions,” said Nida Ali, economic advisor to the Ernst & Young ITEM Club. In the past decade, service industries such as banking have driven UK GDP while manufacturing was in decline.
Although the weather was blamed for the severity of the fall in activity in December, the survey also attributed part of the weakness to falling public sector demand in the face of the Govenrment spending cuts. It noted that this was likely to persist in the months ahead.
Alan Clarke, economist at BNP Paribas, said: “We believe that this helps to explain the divergence between the services sector index and manufacturing. The latter is clearly benefiting from the strengthening in overseas demand. The services sector is probably a greater reflection of the strength of the domestic economy has been less impressive in recent months.”
Chris Williamson, chief economist at Markit, added: “From the three surveys, there is a strong indication that UK economic growth is completely reliant upon export sales while domestic demand has wilted.”
Activity in the services sector slumped from 53 in November to 49.7, where any measure under 50 represents contraction. It was the first sub-50 result since April 2009, when the economy was still in recession. The survey added that “underlying trends remained subdued ... this led to another month of job losses and also served to subdue business confidence”.
It was the third successive month that the sector had reported job losses as hotels, restaurants, caterers and personal services bore the brunt of the weather disruption and flagging demand.
One poor month is not expected to have pushed the economy into contraction for the final quarter of last year, though. Economists held their forecasts for 0.4pc growth, which would deliver around 1.7pc for the year as a whole. Vicky Redwood of Capital Economics, said: “It is notable that firms themselves were not too perturbed, with the business expectations balance rising. Accordingly, activity is likely to rebound this month.”
However, the data contained enough bad news to knock any resurgent confidence. “Bad weather undoubtedly hit service sector business in December, but there are also clear signs that domestic demand has weakened as households and business continued to rein in spending,” Mr Williamson said.
Prices increased at their fastest rate since September 2008 and businesses were not able to pass all of the rise on to customers because of weak demand.
By Philip Aldrick, Economics Editor
Source: http://www.telegraph.co.uk
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