Service sector growth slows to weakest pace in 22 months

The Weakest Link (UK game show) (Photo credit: Wikipedia)

London, Nov.5, hot stock picks .- The growth of the UK's service sector slowed to the weakest pace in almost two years during October, prompting a warning that while the double-dip recession may have ended, Britain is still a long way from a sustainable economic recovery. The Purchasing Managers' Index from Markit and the Chartered Institute of Purchasing and Supply (CIPS) fell to 50.6 points last month - only just above the 50-point mark that separates expansion from contraction. This was down from a score of 52.2 in September and represented the slowest rate of growth in 22 months of rising activity.

The flow of new orders weakened in October, although the report said they had still increased at a "solid" pace. Some service providers reported that new work was supported by improved demand from export markets.

Nevertheless, the growth in new orders was not sufficient to outweigh the completion of existing projects, meaning backlogs of work shrank after a marginal increase in September. Overall employment declined for a second consecutive month, although the rate of job cuts was weaker than September. Service providers said that the reduction in staff was down to workforce restructuring and the non-replacement of departing employees. Overheads rose at a "solid" pace for the third month in a row, with an increase in the national minimum wage contributing to higher average staff costs. Companies also reported increases in prices for energy, food and fuel.

However, continuing pressure from clients for discounts and strong competition meant that service providers could pass on only a portion of these rising costs to customers. Looking ahead, around 42 per cent of service sector companies were optimistic that business activity will continue to rise over the coming 12 months on the back of improving economic conditions and stronger client confidence. This was the weakest level of positive sentiment in four months. Andrew Harker, an economist at Markit, said the survey's findings are a "warning to those who saw the strong growth in GDP in Q3 as symbolising the start of a strong and speedy economic recovery".

"With activity rising at the weakest pace in close to two years, the broadly stagnant trend seen in official data over the year to date looks to have continued at the start of the fourth quarter," he commented. "Although there are signs of improvements, panellists still referred to the fragility of both demand and confidence among clients. Competitive pressures were also highlighted, both by respondents and by the slight nature of output price inflation."The expectation among firms is for activity to improve over the coming year, but the road to full economic recovery still looks to be a long one."

By Andy Jowett

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