UK service sector contracts for first time in two years

'Very disappointing' fall in activity in dominant economic sector raises fears Britain is headed for triple-dip recession

A shock fall in activity in Britain's services sector at the end of last year has put the economy on the road to a triple-dip recession, as economists predict the UK will be stripped of its triple-A credit rating.

The services sector – including banking, retail and travel – accounts for three-quarters of the UK economy

The services sector – which accounts for three-quarters of Britain's economic output – shrank for the first time in two years in December, suggesting the UK economy contracted in the fourth quarter. If output drops again over the next three months, the UK will fall into its thirdrecession in five years – an unprecedented triple dip.

Howard Archer of IHS Global Insight said: "This is undeniably a very disappointing survey that fuels fears the economy suffered a renewed dip in GDP in the fourth quarter. Given the dominant role of the services sector and the fact that it has recently been the healthiest part of the UK economy on the output side, the reported fall in activity in December is a significant blow for growth hopes."

The data came out as Citi released a report suggesting the UK economy will disappoint again this year and could lose its prized triple-A credit rating. Michael Saunders, economist at Citi, said Britain is likely to suffer from weak growth, inflation will stay stubbornly high, and the government will fail to make a substantial dent in the deficit. "With the public debt/GDP ratio set to surge further in coming years, we think the UK will lose its AAA rating in 2013," he said.

The closely watched CIPS/Markit purchasing managers index (PMI) for services dropped from 50.2 to 48.9 in December, below the 50 mark that separates expansion from contraction. It is the lowest reading since April 2009 and substantially undershot analyst forecasts of a rise to 50.5.

The survey snuffed out the glimmer of hope offered by data released earlier this week that showed a surprise jump in factory activity in December. But manufacturing accounts for just 10% of the economy and that release was followed by a dreary set of figures from the construction industry, which shrank much faster than expected. Markit said overall the PMIs suggest the UK economy contracted by 0.2% in the last quarter of 2012.

Chris Williamson of Markit said the weakness in services could continue into 2013. "Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the new year."

Poor trading meant companies chose not to replace leaving employees, which led to a slight decline in staff numbers. Williamson said that means UK unemployment could soon start to rise again, as private sector lay-offs add to public sector job cuts.

The news will reignite the debate over whether the Bank of England is likely to expand its quantitative easing (QE) programme to try to kickstart the economy.

Archer said: "While the weak services purchasing managers' survey is unlikely to prompt the Bank of England's monetary policy committee into taking any stimulative [action] at its January meeting next week, it does reinforce our belief that further QE is more likely than not over the coming months. For now though, the MPC is likely to sit tight given current increased inflation concerns and signs that the Funding for Lending Scheme could be having a beneficial impact."

There was better news out of the US, where employers added 155,000 jobs in December, slightly ahead of expectations. But analysts said it was not enough to make a big difference to the unemployment rate.

Article source : http://www.guardian.co.uk

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