Recession threat looms again as service sector activity slows

The Markit/CIPS Purchasing Managers’ Index (PMI), where a reading above 50 indicates growth, showed services activity fell to 51.3 in October from 52.9 the previous month. Incoming new business slowed in the month, according to the survey, as output prices declined, representing the first round of discounting for over a year.

The weak data will add to further evidence of a slowdown or possible contraction in the UK’s overall economy in the final three months of the year. The UK’s gross domestic product (GDP) increased by a better-than-expected 0.5 per cent between July and September, up from the 0.1 per cent rise in the previous quarter.

But the figures released on Tuesday were overshadowed by a Markit/CIPS survey that showed the manufacturing sector contracted at the fastest rate since mid-2009 in October.

The service sector is key to the economic recovery as it makes up around 75 per cent of the total economy. Alan Clarke, UK and eurozone economist at Scotia Capital, said the manufacturing and services figures taken together “points to recession”.

Nida Ali, economic adviser to the Ernst & Young ITEM Club, said: “Today’s services PMI figures are extremely disappointing. The services sector seems to be achieving low levels of growth in the fourth quarter, with the slowdown in new work implying that companies are finding it harder to win business. The sector is struggling to stay afloat. A closer look at the release reveals some unsavoury trends.

“The reduction in output charges means that companies were forced to lower prices in response to muted demand. This is a cause for concern and could be the start of a worrying trend. Combined with the dismal figures for manufacturing earlier this week, it seems likely that there will be barely any growth in the fourth quarter. The economic outlook has deteriorated sharply in recent months and, with the eurozone crisis showing no signs of abating, already weak growth prospects are dominated by downside risks.”

Howard Archer, chief UK and European Economist at IHS Global Insight, said: “While the services purchasing managers’ survey did not deliver a knockout blow to fourth quarter growth hopes, the economy is clearly on the ropes and recession is a serious threat.”