THE UK's dominant services sector last month suffered its steepest drop in activity since April 2009 and shed staff as new orders fell, a key survey shows.

The weakness of the services survey, published yesterday by the Chartered Institute of Purchasing and Supply (CIPS), caught forecasters by surprise.

The survey underlined the challenges facing the UK economy, amid weak consumer and business confidence and continuing cuts in public spending, and raised fears of a triple dip in output.

Loading article content

CIPS' seasonally-adjusted business activity index for the UK services sector dropped from 50.2 in November to 48.9 in December.

This is the first time it has been below the level of 50, calculated by CIPS to separate expansion from contraction, since the snow-hit month of December 2010. The latest reading is the worst since April 2009.

The consensus forecast among economists was for modest growth in UK services activity in December on CIPS' measure, and a reading of about 50.5 had been anticipated.

CIPS said that services companies had highlighted a general reluctance among clients to commit to new business expenditure "at a time of relative economic uncertainty".

The survey revealed a second consecutive monthly drop in incoming new business for services companies in December.

This is the first time there have been such back-to-back falls since the middle of 2009.

Chris Williamson, chief economist of CIPS survey compiler and financial information company Markit, said: "The first fall in service sector activity for two years raises the likelihood that the UK economy is sliding back into recession."

He estimated in the wake of the services survey that UK gross domestic product (GDP) would have fallen by 0.2% in the fourth quarter. This estimate is based on CIPS' monthly UK services, manufacturing, and construction sector surveys for the October to December period.

CIPS' latest surveys have shown modest growth in manufacturing in December, following contraction in November, and an acceleration in the rate of decline in construction activity last month to the fastest since June.

While highlighting the volatile nature of the quarterly UK gross domestic statistics from the Office for National Statistics, Mr Williamson said of his forecast of 0.2% contraction in the final three months of last year: "That is where we think we are. That is our advice to business planners – base what you are doing on the fact the economy is now contracting at a very mild pace."

He highlighted hopes that grim weather might have played a part in the weakness of the UK services sector in December.

CIPS' services survey does not cover the retail sector. It appears, at this stage, that retailers have faced a challenging festive trading period.

According to CIPS, the UK services sector has now shed staff in three of the last four months.

CIPS' services sector employment index fell from 50.3 in November to 49.8 in December. The fall in new business accelerated marginally between November and December, the survey showed.

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "This is undeniably a very disappointing survey that fuels fears that the economy suffered a renewed dip in GDP in the fourth quarter.

"Given the dominant role of the services sector and the fact that it has recently been the healthiest part of the UK economy on the output side, the reported fall in activity in December is a significant blow for growth hopes."

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "December's CIPS/Markit report on services...suggested that the economy still looks likely to have contracted in the final quarter of 2012."

She projects that UK GDP will have fallen by 0.4% in the fourth quarter.

The UK's recovery from its deep recession of 2008/09 proved short-lived. It contracted in three consecutive quarters to June last year, before rebounding in the three months to September.