Crucial service sector growth slows

Growth in the UK's crucial services sector slowed last month as businesses warned of a worrying lack of consumer demand before the key festive trading period.

Companies operating in the sector, which accounts for about two-thirds of the economy, made job losses for the second month in a row, casting doubt on its ability to compensate for cuts in the public sector.

The findings were contained in the latest purchasing managers' index (PMI) survey compiled by Markit and the Chartered Institute of Purchasing & Supply (Cips), which was published yesterday.

Its headline business activity index eased to 53 from October's four-month high of 53.2 although the result was broadly in line with forecasts. A reading of 50 or above indicates growth.

Although the sector has now grown for 19 months in a row, the rate of expansion has eased in recent months after it had been above 55 earlier in the year.

David Noble, chief executive at Cips, said: "Forward looking indicators are already showing signs of instability, with purchasing managers reporting weak consumer demand. This is worrying as we would expect demand to be higher during the Christmas period."

New business increased to its strongest level since June but was described as lacklustre and still well below pre-recession levels.

Analysts said the survey outcome was slightly disappointing following a run of better-than-expected manufacturing and construction data and implied a slowdown in overall GDP growth for the final three months of the year.

Ross Walker at Royal Bank of Scotland said: "It's not disastrous but it's definitely sub-trend. It's in the services sector where the recovery is more vulnerable, and there are some sectors which are vulnerable to weaker consumer and domestic demand.

"It's mildly disappointing and is just going to reinforce the near-term policy inertia."

The survey is unlikely to alter expectations that the Bank of England will keep monetary policy loose as it waits to see how planned government spending cuts hit demand.

Capital Economics' Vicky Redwood said: "(It's] perhaps a bit disappointing after the recent run of improved news on the economy.

"Given the sharp pick-up in the manufacturing PMI earlier this week, a composite measure of the Cips' surveys still rose in November. But, on the face of it, it points to quarterly GDP growth of just 0.3 per cent or so."

Analysts predict that overall GDP growth will slow sharply in the final three months of 2010 from the surprisingly robust 0.8 per cent expansion recorded in the third quarter.

Shehan Mohamed, an economist at CEBR, said UK economy would have to be "less reliant on the consumer and more dependent upon export performance as a driver of future growth".