December 3, 2009 / 9:39 AM / 10 years ago

UK services recovery loses momentum

LONDON (Reuters) - The service sector grew more slowly than forecast in November, a purchasing managers’ survey showed on Thursday, but economists remained confident the economy would return to growth in the fourth quarter.

Evening commuters are seen in central London March 18, 2009. REUTERS/Toby Melville

Weak money supply figures and a surprise dip in a similar survey of the manufacturing sector earlier this week have raised concerns over the sustainability of the recovery.

Wednesday’s survey — showing British services activity grew at a steady, but not spectacular rate last month — calmed some nerves, particularly as forward-looking components such as new business and expectations continued to rise.

“It’s a bit worse than expected but after the big drop in the manufacturing PMI index earlier this week I think it comes as something of a relief,” said David Page, an economist at Investec.

“The survey suggests the service sector is still expanding at healthy rate,” he added.

The Chartered Institute of Purchasing and Supply/Markit activity index came in at 56.6, the seventh consecutive month above the 50 level that indicates expansion but below October’s two-year high of 56.9 and the consensus forecast of 57.0.

Britain must hold an election by June of next year, and a strong recovery would provide a boost to Prime Minister Gordon Brown’s Labour Party, which trails the opposition Conservatives in the polls.

NEW BUSINESS UP FOR 4TH MONTH

New business rose for a fourth month in a row and at the fastest pace since September 2007.

“Although growth weakened marginally during November, the recovery of the UK service sector remained intact,” said Paul Smith, a senior economist at Markit.

He said the survey suggested the service sector was on course for a quarterly expansion of around 1.0 percent in the fourth quarter.

However, recent PMI surveys have not been matched by the official national data and some analysts worry that “survivor bias” and problems inherent with sentiment-based indices mean the PMI figures are overstating the true picture.

Britain’s economy shrank 0.3 percent in the third quarter despite the fact that PMI indicators had suggested the economy had already emerged from recession.

“Given the divergence of survey results from the official data, there is reason to remain cautious,” said Hetal Mehta, an economist at Ernst & Young.

The PMI report said the latest expansion had been centred on the financial and business services sectors, with large companies benefiting more than small ones.

Nonetheless, firms continued to shed jobs and there was evidence to suggest that operating conditions remained tough. Firms cut output charges despite the steepest rise in input costs for over a year, an indication that competitive pressures remained intense.

A similar survey for the euro zone showed services activity grew at its fastest pace in 23-months in November, although southern European economies trailed Germany and France.

Editing by Ruth Pitchford and Victoria Main

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