BRITAIN’S economy is likely to have slipped into reverse, experts warned yesterday, after the powerhouse services sector shrank last month for the first time in two years.
Economists said the slump, combined with mixed manufacturing and construction figures earlier this week, suggested the economy contracted by as much as 0.4 per cent in the final quarter of 2012.
However, a return to a full-blown recession – defined as two consecutive quarters of declining output – appears less likely amid predictions of a pick-up in activity in the opening months of the new year.
The latest Markit/Cips purchasing managers’ index (PMI) for the services sector, which accounts for more than two-thirds of the economy, fell to 48.9 in December, down from 50.2 a month earlier and confounding forecasts for a small rise.
It marks the lowest reading since April 2009 and the first dip since a snow-related decline in December 2010. Any figure below 50 denotes contraction.
A fresh fall in gross domestic product (GDP), just months after Britain emerged from its second recession since the financial crisis with Q3 growth of 0.9 per cent, would be a blow for Chancellor George Osborne. It is also likely to heap pressure on the Bank of England to restart its quantitative easing programme – something most analysts currently doubt.
David Tinsley, UK economist at investment bank BNP Paribas, described the PMI report as “surprisingly soft” and suggested some of the weakness may have been weather related.
He said: “December can be a funny month for seasonal pre-Christmas influences, and it was exceptionally wet – the wettest since 1999.
“So some of the impact might be weather related, but it does appear that underlying services activity was soft in the fourth quarter. We doubt though it’s quite as extreme as the PMI would suggest.
“As we head into February and March it should become increasingly clear that UK economic performance will be better in 2013 than it was in 2012.”
Service sector companies reported a slide in new work in December amid budget constraints and a lack of confidence, which was the second back-to-back decrease in new work since mid 2009.
Chris Williamson, chief economist at Markit, said the sector blow “raises the likelihood that the UK economy is sliding back into recession”. He added: “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.”
Vicky Redwood, at Capital Economics, is pencilling in a 0.4 per cent fall in GDP in the fourth quarter.
IHS Global Insight chief UK and European economist Howard Archer is forecasting flat GDP, but said the result would depend on how much consumers spent in December.
The PMI survey does not cover the retail sector, but there is little confidence that spending over Christmas was enough to offset woes in the services and construction sectors, given cost pressures on UK households. The first official estimate of fourth-quarter GDP will be released on 25 January, although consumer spending figures will not be included until the second estimate.
