Return to recession ‘on the cards’ as key service sector slumps

The economy is at “serious risk” of contracting before the end of the year and could remain in the doldrums during the first three months of 2012 amid a worrying slowdown in the powerhouse services industry, according to the latest business trends survey from accountancy firm BDO.

A survey of small manufacturers by the CBI – also out today – paints a similarly downbeat picture as sentiment levels recorded their sharpest fall since April 2009, when the economy was gripped by recession.

Although third-quarter GDP figures published last week surprised economists with greater-than-expected growth of 0.5 per cent, evidence is pointing to a grimmer fourth quarter.

According to the BDO output index, which measures businesses’ turnover expectations, the outlook has not been more depressed since June 2009.

It is the third consecutive month that the index – which dropped to a reading of 92.6 in October from 93.3 the previous month – fell below the crucial 95.0 mark indicating on-trend growth. This means the economy could already be contracting, according to BDO.

The principle culprit is the services sector, which encompasses everything from legal practices to hotels and accounts for almost three-quarters of economic growth.

BDO’s output index for the services sector fell to 92.9 in October from 93.9, while the optimism index for the sector also slipped to 94.1 from 94.8, showing the problems are likely to persist well into next year.

The findings echo those of the respected purchasing managers’ index for services, which last week showed a greater-than-expected drop in output for October.

Neil Craig, a partner at BDO in Glasgow, said: “Despite official GDP figures for Q3 exceeding expectations, the UK’s economic recovery remains sluggish and we could already be entering a period of negative growth.

“We urge the Chancellor [George Osborne] to tackle the slowing recovery head on in his autumn statement. Supply side reforms, in particular reform of the tax system, will be crucial if the UK is to promote investment.”

He called on the UK government to stimulate growth by updating Britain’s ageing transport network and other infrastructure.

Despite the dark outlook for GDP growth, the Ernst & Young Item Club group of economists say households will at least experience a better year in 2012 as inflation eases off.

In a report, also published today, the Item Club says the rise in the cost of living will dip below 2 per cent over the next 12 months from its current level of 5.2 per cent.

Nevertheless, inflation is likely to rear its head once again when the recovery has taken hold.