Slowdown in services hits growth hope

Group Business Editor

Thursday 4 October 2012

GROWTH in UK services activity slowed significantly in September, and the sector's workforce fell for the first time in 10 months, according to a key survey which signals the economy is still failing to mount a recovery.

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Ian McCONNELL BUSINESS EDITOR

The service sector survey, published yesterday by the Chartered Institute of Purchasing and Supply (CIPS), follows weak reports from CIPS on manufacturing and construction earlier this week.

Chris Williamson, chief economist at CIPS's survey compiler and financial information company Markit, said these purchasing managers' index (PMI) reports on services, manufacturing and construction pointed to "near-stagnation" of UK gross domestic product (GDP) in the third quarter.

He said GDP figures from the Office for National Statistics (ONS) were likely to show a "technical bounce-back" in UK economic output in the third quarter because of the downward impact on activity of the extra holiday for the Queen's Diamond Jubilee in the three months to June.However, citing a survey from the British Chambers of Commerce (BCC) earlier this week which pointed to UK economic output flatlining in the third quarter, Mr Williamson added: "The PMI data therefore suggest that any buoyancy of GDP data should not be taken as a sign of economic recovery. Instead, the PMI surveys provide an insight into the underlying trend of the economy and – like the BCC survey – warn of a slowing to near-stagnation in the third quarter."The ONS has calculated that UK GDP fell by 0.4% in the second quarter, and cited the impact of the extra public holiday. This drop was the third consecutive quarterly fall in economic output.Mr Williamson said the drop in services employment in September, signalled by CIPS's survey, was one of the steepest monthly falls in the sector's workforce since 2009.He added: "With the mini-boom in the labour market having now come to an end, it seems inevitable that unemployment will start to rise again unless demand picks up again."CIPS's employment index for the UK service sector dropped from 51.3 in August to 48.3 last month on a seasonally adjusted basis. Its business activity index for services dropped from 53.7 in August to 52.2 in September on the same basis.Although the business activity index remained above the level of 50 (calculated by CIPS to separate expansion from contraction), this fall signals a significant deceleration in growth of this dominant sector of the UK economy.On a more positive note, CIPS's services survey signalled a pick-up in the rate of growth in new business, with some firms reporting strengthened demand after an Olympic Games-related lull in market activity.CIPS recorded a rise in services companies' expectations about activity levels in the coming 12 months. But optimism nevertheless remained significantly below the long-term survey average.CIPS said: "A number of panellists remain concerned about the fragility of the economic climate, and worry about this continuing in coming months. Business confidence, despite rising, subsequently remained well below trend in September."Martin Beck, UK economist at consultancy Capital Economics, said: "September's CIPS/Markit report on services was consistent with the message from the other activity surveys this week, namely of an economy struggling to grow. While some softening in activity in September was always possible given a temporary boost from the Olympics in August, the big picture is that the business surveys remain at fairly weak levels."He added: "On the basis of past form, a weighted average of the manufacturing, construction and services surveys is consistent with a slight decline in GDP in the third quarter."The CIPS surveys seem to have been relatively unaffected by temporary factors such as June's extra bank holiday. Accordingly, the official measure of GDP will probably still show a decent rebound as the bank holiday effect unwinds. But at the very least, the surveys suggest that underlying output is still struggling to grow."

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Slowdown in services hits growth hope

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