LONDON (Reuters) - Growth in the dominant services sector slowed more than expected in October, a survey showed on Thursday, adding to signs the country risks slipping back into recession as manufacturers are already slamming the brakes on production.
Leading economic think tank NIESR said the country faced a 50 percent chance of recession, and Bank of England policymaker Charles Bean said the growth outlook for next year had worsened materially over recent months.
The Markit/CIPS Purchasing Managers’ Index (PMI) for the service sector slipped to 51.3 in October from 52.9 in September, falling short of expectations for a dip to 52.0 and edging closer to the 50 mark that separates growth from contraction.
The manufacturing sector, once the bright spot in Britain’s lacklustre recovery, contracted at its fastest pace in more than two years as new orders plummeted, PMI surveys showed on Tuesday.
Markit said a likely worsening of the PMIs in November or December would mean a contraction in fourth-quarter GDP of around 0.1-0.2 percent.
“It is clear that the threat of recession is on the rise,” said James Knightley at ING.
Thursday’s poll showed a marked improvement in business confidence with service sector firms at their most optimistic since May, as they hope new products and projects, improved efficiency and more marketing will support growth.
“This is heartening but difficult to explain. Are they looking through the current euro crisis to a sunnier and calmer 2012? If so, let’s hope that they are right,” said Brian Hilliard at Societe Generale.
The figures failed to impact markets transfixed by turmoil in the euro zone following Athens’ decision to hold a referendum on last week’s bailout package, which on Thursday threatened to bring down the Greek government.
The economy grew by 0.5 percent in the third quarter, but economists see weaker growth ahead and gave a median one-in-three chance the country will head into another recession in the next 12 months.
NIESR said the economy would grow by only 0.8 percent next year. The researchers saw a near 50 percent chance of recession, adding that if European leaders fail to resolve the euro zone debt crisis the chances rose to 70 percent.
Leaders announced measures last week to help reduce Greece’s huge debts, boost the region’s bailout fund and strengthen banks, but a shock call from Athens this week for a referendum stoked fears that the breakthrough deal would crumble.
The euro zone is Britain’s main trading partner, and data due on Friday is expected to show the euro zone’s services sector contracted for a third month.
The government has come under pressure to ease back on its austerity plans and introduce measures to boost growth. Chancellor George Osborne acknowledged on Tuesday that the country faced a rough ride but he reiterated his commitment to erasing a record budget deficit of nearly 10 percent of GDP.
The economy will show only moderate growth at best in the final three months of the year, BoE Deputy Governor Bean said on Thursday, adding that tensions in financial markets were depressing confidence.
Bean said falling inflation would provide some relief next year for cash-strapped consumers suffering from soaring prices at a time of meagre wage increases.
While many retailers struggle with the lack of consumer spending, JD Wetherspoon (JDW.L), one of the best-performing pub groups in the downturn because of its value-for-money offers, said on Thursday its sales had been resilient.
Fierce competition among British services firms, which account for around two-thirds of economic activity, forced them to cut fees for the first time since September 2010 — the prices charged index fell to 48.6 last month from 50.0 — even as costs rose.
Inflation rose to a three-year high in September of 5.2 percent, well above the Bank of England’s 2 percent target, but is seen easing over coming quarters.
Despite inflation so far above target, the BoE has already launched a second round of quantitative easing, pumping additional money into the economy, and policymakers have warned the country risks slipping into another recession.
“The BoE decision to add 75 billion pounds to its asset purchases programme in early October is also expected to be relatively supportive, or at least reduce the risks of a recessionary path in all the major industries,” said Annalisa Piazza at Newedge Strategy.
But, in further signs of trouble ahead, service sector firms, which range from storage and communication businesses to hotels and restaurants, reduced their workforce last month, as did manufacturers, suggesting unemployment was set to rise above the 17-year high seen in the three months to August.