December 5, 2011 / 9:38 AM / 9 years ago

Services pick-up gives little comfort on UK economy

LONDON (Reuters) - Britain’s dominant services sector picked up slightly last month, defying forecasts it would stagnate, but analysts said the data did little to ease concerns that the economy could contract early next year.

Staff hold trays of drinks at a reception at the Lord Mayor's Banquet in the City of London November 14, 2011. REUTERS/Toby Melville

The Markit/CIPS Purchasing Managers’ Index for the service sector rose to 52.1 in November from 51.3 in October, confounding expectations for a dip to 50.5 and edging further above the 50 mark that separates growth from contraction.

However, the index was still below September’s reading of 52.9 and Monday’s survey also showed that employers shed jobs at the fastest pace in more than a year.

The figures did not alter expectations that the Bank of England will inject fresh stimulus into the frail economy soon, although not on Thursday when its Monetary Policy Committee members conclude their monthly meeting.

Britain’s economy is likely to barely grow in the final three months of 2011, after PMI surveys last week showed sluggish construction activity and the biggest fall in manufacturing since June 2009.

“There’s a significant risk that the UK will fall into a recession in the first half of next year, so today’s survey only provides limited reassurance on the economy,” said Philip Shaw, economist at Investec.

“Further QE seems an odds-on possibility to us, but not this week,” he added.


A raft of weak data over the past few months have suggested that Britain’s economy is slowing sharply, having barely grown over the last year. Britain’s fiscal watchdog warned last week that the UK could fall back into recession.

A separate survey on Monday showed British manufacturing output growing at its weakest pace in nearly two years in the fourth quarter, and firms expect it to stagnate early next year, held back by worries about the euro zone and weak demand at home.

The PMI survey showed that pick up in services activity was driven by a continued inflow of new business — albeit at the slowest rate since December 2010.

However, a fifth of firms reported a drop in business, blaming the tough economic climate, euro zone debt crisis, weak bank lending and public spending cuts.

Overall, brisker business did not translate into safer job prospects. The employment sub-component fell to 48.2 from 49.8, showing the biggest drop in the workforce in 15 months.

Taken with an equivalent survey of manufacturing last week that showed firms cut jobs at the fastest rate in more than two years, Monday’s data signals that unemployment in Britain is likely to rise above the 15-year high of 8.3 percent recorded in the three months to September.

The uncertain economic outlook also weighed on business confidence in the services PMI, which slipped from October’s five-month peak.

Companies’ profit margins were pressured by higher input costs, as utility bills and transport costs rose, while their ability to pass these on to clients was limited by discounting and the need to stay competitive, the data showed.

Additional reporting by Fiona Shaikh and David Milliken; editing by Anna Willard

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