FEARS that the UK economy is heading back into recession have intensified with the revelation that growth in the dominant services sector slowed sharply in October.
The slowdown to near-stagnation was revealed in a key survey published yesterday by the Chartered Institute of Purchasing and Supply(CIPS).
Chris Williamson, chief economist at CIPS survey compiler Markit, declared the composite purchasing managers’ index from reports on services, manufacturing and construction this week signalled a “stagnation” of overall UK gross domestic product in October.
He warned that these surveys, which together signalled the second-weakest trend in new orders since the depths of the recession in June 2009, add “to the risk of the economy sliding back into contraction in the fourth quarter”.
UK GDP grew 0.5% in the third quarter, but economists have noted the beneficial impact of temporary factors in this period.
CIPS’ business activity index for services dropped from 52.9 in September to 51.3 in October on a seasonally adjusted basis. This was only modestly above the level of 50 which separates expansion from contraction and below the City forecast of 52.
The pace of growth of UK services companies’ new orders eased in October to the weakest rate in the current 10-month run of increase.
And employment in services fell in October, after a very marginal rise in September.
Howard Archer, chief UK economist at consultancy IHS Global Insight, said: “While the services purchasing managers’ survey did not deliver a knockout blow to fourth-quarter growth hopes, the economy is clearly on the ropes and recession is a serious threat.”
CIPS’ UK all-sector PMI, a weighted average of the output indices in the services, manufacturing, and construction sector surveys, dropped from 52.7 in September to 51 in October.
Manufacturing output contracted in October, according to CIPS, while construction sector growth accelerated.
Mr Williamson said: “A downturn in the all-sector PMI signals a stagnation of GDP in October, and a worsening trend in new orders suggests the survey data may worsen in coming months, adding to the risk of the economy sliding back into contraction in the fourth quarter.”
He pointed out that the all-sector UK PMI was, with the exception of August, the weakest reading since June 2009.
Mr Williamson said: “This suggests the private sector economy is expanding, but only at a very modest pace, and that the wider economy, as measured [by] gross domestic product, probably stagnated in October. Any worsening of the PMI data in November and December would imply a contraction of GDP in the fourth quarter.”
He added: “Unfortunately, the forward-looking indicators from the survey suggest a worsening trend of business conditions is likely as we move towards the end of the year. Most worrying was a slowdown in growth of incoming new business across the three sectors to the second-weakest pace since June 2009 – only the near-stagnation caused by heavy snowfall last December was weaker.”
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