Services slump points to Q4 contraction

LONDON Fri Dec 23, 2011 12:54pm GMT

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LONDON (Reuters) - Britain's dominant services sector shrank in October at its fastest pace since April, suggesting the economy may already have entered recession.

The monthly drop of 0.7 percent in services output revealed by the Office for National Statistics on Friday reinforced views that the Bank of England will inject more cash into the economy in February once its current round of quantitative easing ends.

"The sharp fall ... is a major blow to GDP growth prospects and significantly fuels concern that the economy could contract in the fourth quarter," said Howard Archer, economist at IHS Global Insight.

Pressures on cash-strapped consumers, businesses and the public sector are all squeezing services activity, he added.

The sector accounts for about three quarters of Britain's output and was the main growth driver between July and September when the economy expanded by 0.6 percent on the quarter.

In the wake of the release, the yield on 10-year gilts fell to a fresh record low just below 2 percent in thin trading ahead of the Christmas holidays.

Industrial output also fell at its sharpest pace in six months in October and business surveys are pointing to more weakness ahead.

"Business services turnover growth had slowed quite sharply over the past few months, reflecting weaker activity," the Bank said this week in a summary of business conditions in November.

LACK OF CONFIDENCE

A sharply deteriorating growth outlook and worries that the euro zone debt crisis is tipping Britain back into a slump encouraged the central bank to restart its quantitative easing programme in October.

The Bank has left the door open for further stimulus in February, and most economists reckon it will inject as much as 75 billion pounds on top of the 75 billion it added in October.

Lending data released by the British Bankers' Association on Friday showed that consumers continued to struggle in November.

"Households and businesses lack the confidence needed to seek credit for spending or investment," it said.

The ONS said on Friday major drags on services output came from telecommunications, computer programming and financial services excluding insurance and pension funds.

The weak start by the services sector in the final quarter overshadows a few glimmers of hope from Britain's retailers, which managed to lure in shoppers with hefty pre-Christmas discounts.

Department-store and online retailer John Lewis, a favourite among wealthier shoppers, said on Friday that sales rose 6.8 percent on the year in the week to December 17.

(Editing by John Stonestreet)

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