UK services growth stalls

UK service sector output slowed sharply in August, its worst performance since the foot-and-mouth crisis of 2001. Remember those heady days?

by Dave Waller
Last Updated: 12 Sep 2011
The Markit/CIPS services purchasing managers’ index fell from 55.4 in July to 51.1 in August. Just meaningless numbers perhaps, until you put them in context: this is the second-biggest fall on record – worse even than in the weeks after the collapse of Lehman Brothers.

It gets worse when you realise that economists, who would’ve presumably been braced for underwhelming figures from the outset, had expected the decline to be much smaller. They were predicting the index would read around 54 points. As it was, the results are painfully close to the 50-point mark, the line that separates expansion from dreaded contraction.

So we have a serious problem here: the services sector accounts for around three-quarters of the UK’s GDP. According to the survey, backlogs of work shrank, employment declined and business expectations dropped to the lowest level in a year. Companies reported slower growth of new business and a general sense of economic uncertainty. Input prices were still rising quickly, but businesses weren’t increasing their own prices at the same rate, presumably with the realisation that demand couldn’t cushion the rise in costs.

Hardly a sparkling picture, then, and one that suggests contraction in the third quarter is not an unlikely outcome. Unfortunately the problems aren’t limited to the services sector: other surveys last week suggested that manufacturing and construction were also struggling. That said, the Manufacturing Outlook survey by manufacturing organisation EEF found British manufacturing output to be holding up well in the third quarter, boosted by resilient demand abroad. A balance of 27% of manufacturers said they had increased output in the last three months, slightly less than the 28% in the EEF's Q2 survey, published in June.

We wish we could say the picture looked good elsewhere, but the gloom is fairly widespread. Not only were the US labour figures abysmal last week, but HSBC's monthly PMI survey showed that China's services companies grew at their lowest rate since the survey began in November 2005, at 50.6 in August from 53.5 in July. Meanwhile the eurozone suffered its slowest growth in economic activity for almost two years. Markit reported that the combined eurozone services and manufacturing PMI fell to 50.7 in August, with business optimism falling significantly in Germany, France, Spain and Italy.

So with the threat of double-dip recession looming large in Europe, it looks like the Bank of England monetary policy committee will have a lot to chew on when it meets on Thursday to set the interest rates. We’re sure the phrase ‘quantitative easing’ may be bandied about more than a little. The one take-away from all this: at least services activity is still expanding – it’s a case of growth slowing, rather than activity contracting. For now.

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