Service sector in deep freeze as growth tumbles

Published on Thursday 2 September 2010 23:20

Britain's economic growth is likely to have fallen to less than half the record 1.2 per cent pace set in the second quarter after a "worrying" slowdown in the nation's crucial services sector.

Economists yesterday put gross domestic product (GDP) expansion at no more than 0.5 per cent in the three months to September as it emerged that service-sector activity grew last month at its weakest rate in more than a year.

The downturn - revealed in the latest industry snapshot from the Chartered Institute of Purchasing and Supply (Cips) - will stoke fears the economy is heading back into the mire.

However, some analysts believe the country can still avoid a so-called "double dip" recession. That sense of optimism will have been heightened by this week's solid market gains.

Last night, the FTSE 100 Index closed up more than 57 points, or 1 per cent, at 5,428.15 with investors buoyed by news that US employers had shed fewer jobs than feared in August. It was the Footsie's sixth winning session in a row.

The closely-watched US non-farm payrolls were expected to show more than 100,000 jobs lost over the month, but the figure came in at 54,000.

Britain's service sector accounts for some 70 per cent of total economic output and encompasses everything from banks and legal firms to hotels and restaurants.

Cips' latest activity index - where a score above 50 denotes growth - fell from 53.1 in July to 51.3 last month, the biggest drop since May 2009 and a lower reading than the majority of analysts had predicted.

Firms were found to be shedding jobs at the fastest rate since October while sales growth slumped to a 14-month low.

The downbeat findings follow bigger-than-expected falls in the equivalent indices for manufacturing and construction, published earlier this week, although all are still above the 50 line that divides growth from contraction.

Research group Markit, which co-authors the three reports, said the surveys suggested that GDP growth slowed to 0.5 per cent in the third quarter from the nine-year high of 1.2 per cent set the quarter before.

Markit chief economist Chris Williamson said: "While a double-dip recession remains unlikely, the survey suggests that the risk has increased and that growth looks set to be slow and choppy going forward."

BNP Paribas economist Alan Clarke said the services report confirmed that Q2 GDP growth was "a blip" and pointed to "negative quarter-on-quarter growth around the turn of the year".

Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club think-tank, said this week's survey data pointed to a "prolonged period of slow growth, but not a double-dip".

Cips found that, while IT and computing firms showed good growth, business services providers were under more pressure amid declining activity and new business.Doubts over the impact of next month's government spending review were also sapping confidence.

Meanwhile, the UK's building sector came in for a fresh pounding yesterday after construction orders suffered a dramatic 14 per cent fall between April and June, according to figures from the Office for National Statistics.

The slide was led by public and private housing orders - down 23 per cent and 24 per cent respectively - and is the biggest slump outside of a recession over a single quarter since 1987.

IHS Global Insight economist Howard Archer said: "While the construction sector only accounts for 6.3 per cent of national output, the recent marked slowdown in activity adds to concerns over the economic outlook."