UK’s service sector growth slows, fuelling fears of fresh recession

Official data earlier this week revealed better-than-expected GDP growth over the summer, though most forecasters expect the rebound to be short-lived as companies and consumers come under increasing pressure.

Releasing the latest purchasing managers’ index (PMI) for the service sector, which accounts for more than two-thirds of the economy, the Chartered Institute of Purchasing & Supply (Cips) and research firm Markit said new business wins were becoming hard to secure.

The survey’s headline activity barometer slipped to 51.3 in October from 52.9 a month earlier, edging closer to the 50 mark that separates growth from contraction. It had been expected to ease to about 52.

The weak outcome adds to evidence of a slowdown or possible contraction in the UK’s overall economy in the final three months of the year, and beyond.

The coalition government has been pinning its hopes on a resurgent manufacturing sector to take up slack elsewhere in the economy. That optimism appeared dashed this week when Cips’ manufacturing PMI showed output contracting at its fastest pace in more than two years as new orders plummeted.

Alan Clarke, UK and eurozone economist at Scotia Capital, said the manufacturing and services figures taken together “points to recession”.

Markit warned that a likely worsening of the PMIs in November or December would mean a contraction in fourth-quarter GDP of around 0.1-0.2 per cent. That would compare with Tuesday’s initial Q3 reading showing growth of 0.5 per cent. A recession is triggered by two consecutive quarters of contraction.

Top think-tank the National Institute of Economic and Social Research has already warned that there is a near-50 per cent chance of another recession, rising to 70 per cent if European leaders fail to resolve the raging eurozone debt crisis.

Meanwhile, Bank of England deputy governor Charles Bean yesterday conceded that Britain’s economy was facing a testing year ahead.

Speaking at a conference in London, Bean said the probability of “low growth out-turns” over the next year or so was “materially higher now that it was in the early part of the year”.

There was some cheer in the services PMI report as business confidence hit its highest level since May, a welcome improvement following September’s two-and-a-half-year low.

Improved business pipelines, plans to raise marketing and introduce new products were all noted as factors supporting confidence.

Chris Williamson, chief economist at Markit, said: “The sector made a strong contribution to economic growth in the third quarter, but this looks set to wane in the final quarter of the year.”