UK service sector stalls, recovery in jeopardy - PMI

LONDON Wed Dec 5, 2012 9:42am GMT

LONDON (Reuters) - Britain's dominant service sector grew last month at its slowest pace in nearly two years as new orders fell, a survey showed on Wednesday, suggesting the economy could start contracting again.

The Markit/CIPS Services Purchasing Managers' Index fell to 50.2 from October's 50.6, confounding expectations for a rise to 51.1 and matching the lowest forecast in a Reuters poll of 23 economists.

"The survey adds to worrying signs that the economy faces a renewed slide back into contraction after the temporary growth surge seen in the third quarter," said Chris Williamson, chief economist at Markit, which puts together the monthly survey of purchasing managers.

Some of the lukewarm growth last month was generated by firms running down outstanding business for the second month, the survey showed.

The survey will provide depressing reading for Chancellor George Osborne who presents a half-yearly budget statement to parliament at 12:40 p.m. in which he is seen sticking with his tough austerity plans.

Weak growth means public borrowing is not falling as Osborne planned earlier this year, and initial figures on Monday on a flagship Bank of England scheme to boost lending suggested any big benefit is several months away.

After receiving a huge boost from London's hosting of the Olympic Games and extra working days, the economy escaped recession last quarter. But growth in the coming year is forecast to be weak.

The recovery has been hampered by a drawn-out debt crisis in the euro zone, Britain's main trading partner, as well as by the government's deep spending cuts.

Earlier data from the 17-nation bloc showed its economic slump was a little less pronounced in November than previously thought but the region still looks on course for another quarter of recession.

Still, a composite PMI for Britain, which combines services, manufacturing and construction, nudged up to 50.2 from October's 49.6, suggesting a broadly flat quarter.

NEW ORDERS FALL

The new orders index sank to 49.6 from October's 52.9 as underlying demand remained weak. It was the first time the index has been below 50 since the country ground to a halt amid deep snowfall in December 2010.

Reflecting the gloomy outlook and the subdued conditions, firms' confidence fell to an 11-month low. They did, however, increase staffing levels marginally for the first time in three months.

"An imminent upturn also looks unlikely. Not only did levels of new business suffer a renewed decline, companies' expectations about the year ahead also deteriorated further, suggesting the country faces a worsening economic outlook as it approaches the New Year," Williamson said.

The Bank of England slashed interest rates to a record low of 0.5 percent back in March 2009 and has since pumped 375 billion pounds of cash into the money supply to boost lending.

None of the 66 policy-watchers polled by Reuters last week expected any rate move at the Bank's meeting on Thursday - or indeed until early 2014. No change is seen in its asset purchase programme either.

With inflation running at 2.7 percent, stubbornly above its 2 percent target, the Bank has been reticent to tinker with policy but has launched a new scheme to boost lending.

Once again the Markit survey showed firms increased prices last month, but not as fast as their own costs rose, hitting their margins.

The services survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants, but excludes the retail sector.