Risk of double dip increases as service sector growth stumbles

Employers anxious about another economic slowdown and public sector cuts also led to a marked fall in hiring, with employment falling at the strongest rate since last October.

The headline Markit/CIPS services purchasing managers' index dropped to 51.3 in August from 53.1 in July, a much sharper fall than economists had been expecting. A score over 50 signals growth.

The slowdown in the giant services sector, which covers roles ranging from lawyers to hoteliers and accounts for about three quarters of the UK economy, could be compounded by next month's Government spending review.

"This is a worrying report," said Howard Archer, chief UK and European economist at IHS Global Insight.

"The purchasing managers' survey deals a significant blow to growth prospects.

"The recovery is coming under increasing pressure from the fiscal squeeze.

"In addition, slowing global growth is a concern.

"We currently forecast growth of 0.5 per cent quarter-on-quarter in the third quarter helped by resilient consumer spending, but the downside risks to this forecast is mounting."

The services gloom comes after similar downbeat surveys from CIPS on manufacturing and construction earlier this week, as well as falling house prices.

Markit also said the surveys suggest GDP growth slowing to 0.5 per cent in the third quarter from the surprising 1.2 per cent surge in the second quar-ter

"While a double dip recession remains unlikely, the survey suggests that the risk has increased and that growth looks set to be slow and choppy going forward," said Markit chief economist Chris Williamson.

While IT and computing firms showed good growth, business services firms were under more pressure amid declining activity and new business, Markit added.

Nick Pontone, director of policy for Yorkshire & Humber Chambers of Commerce, said the data reflects concerns raised by its members.

"We shouldn't rush to judgement," he said.

"But there are some warning lights, not least with softer confidence. It's not quite as strong as it was three or four months ago.

"At the moment we're certainly in a period of slowing growth. But its certainly not double dip territory."

The survey also pointed to a trend of companies making redundancies and not replacing leavers. Royal Bank of Scotland this week warned of more than 1,000 job losses in Yorkshire.

Neil McLean, managing partner of DLA Piper in Leeds, said the region's legal sector is emerging from the downturn in better shape than many expected.

"If you look over the last 18 months I do not think things have been as bad as a lot of people expected," he said. "From a legal sector perspective we are seeing reasonably good levels of activity continue."

He added while many firms were choosing not to replace leavers, reflecting caution about prospects, there is still selective recruitment.

"Certainly in our sector people are starting to recruit again. But they are doing it carefully and in areas of activity where business levels still remain high. Finance litigation is busy in all the major firms."

David Noble, chief executive of CIPS, said it was "too early" to predict a return to recession.

He said: "The lowest growth rate in the services sector for over a year does seem to reflect what's been happening elsewhere in the economy.

"Austerity measures and the upcoming increase in VAT appear to be weighing down on confidence.

"The next three months will be critical. Competition for new business will be fierce as companies contend with the pressures of higher costs, overcapacity and a 'wait and see' attitude from buyers.

"These are tense times."

INDUSTRY BLOW AFTER BIG DROP IN CONSTRUCTION ORDERS

Britain's building industry was facing a bleak future after construction orders suffered a dramatic 14 per cent fall between April and June.

The slide was led by public and private housing orders – down 23 per cent and 24 per cent respectively – and is the biggest slump outside of a recession over a single quarter since 1987.

The Office for National Statistics (ONS) figures come despite construction output soaring 8.5 per cent during the second quarter – the sector's best performance since 1982.

The sudden fall sparked grim warnings from the industry over the rocky road ahead as Chancellor George Osborne's savage spending review looms next month.

Construction Products Association economics director Noble Francis said: "The figures highlight that the increase in construction output during the second quarter does not repres-ent a sustained recovery."

Alasdair Reisner, industry affairs director at the Civil Engineering Contractors Association, added: "This is a reality check for the industry."