Six-month low for growth in services sector

The reading of 58.8 in the closely-watched Markit/CIPS purchasing managers’ index (PMI) was below expectations, though still well ahead of the 50 level that separates growth from contraction.

It was the second monthly fall in the index of the services sector – which represents three-quarters of the economy and has led the UK out of recession.

The slowdown mirrors trends in manufacturing and construction, which also lost momentum during December compared to very strong performances in previous months.

It left the average PMI across all three sectors at a five-month low of 59.5.

Yet if borne out by official data, GDP would still have grown by 1 per cent over the fourth quarter and 1.9 per cent over 2013 – though the contribution of retail sales and trade will also have to be taken into account.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “Overall, the purchasing managers’ surveys for services, manufacturing and construction indicate that the UK economy lost some momentum in December but still expanded at a healthy clip.

“Indeed, it still looks very possible that GDP growth in the fourth quarter of 2013 could have at least matched the 0.8 per cent quarter-on-quarter expansion achieved in the third quarter.”

But he said the figures reinforced the view that growth in 2014 will ease off a little.

Alan Clarke, Scotiabank’s director of fixed income strategy, said there was probably “a bit more downside to come” for services but, taken outside comparison with previous figures, the 58.8 reading was still a “stonkingly good number”.

Despite the slip, CIPS said the PMI report still signalled “a historically strong rate of expansion” following growth across every month of 2013.

New work reached an all-time high in the final quarter of the year – though this slipped back in December – with confidence high and increased marketing, and the release of new products bolstering sales.

Optimism was at its highest since March 2010, with well over 50 per cent of firms forecasting growth over the next 12 months. Employment rose for a 12th successive month.

The weakest sub-sectors were hotels and restaurants, though these still saw “decent growth”, said Markit chief economist Chris Williamson. He said: “Although growth of business activity slowed, it’s come down from super-strong levels and the pace of expansion remains elevated.

“More strong growth looks likely as we move into 2014. It is perhaps inevitable, however, that we may see the rate of growth slow compared with the unusually strong pace seen in recent months.”

Both the manufacturing and construction PMIs fell last week, and Markit said a composite index of the three PMIs dropped to 59.5 in December from 60.4, its lowest level since July.

Britain’s economy grew at an annualised rate of more than 3 per cent in the second and third quarters of 2013 – well above its long-term average of just over 2 per cent.

Mr Williamson said the PMIs pointed to an even faster rate of growth in the final three months of 2013.

When fourth-quarter GDP data is published by the Office of National Statistics on January 28, Markit said it could well show that output for 2013 as a whole grew by 1.9 per cent, the fastest growth since the start of the financial crisis in 2007.

That is more than forecast by the Bank of England, the International Monetary Fund or the government’s budget watchdog, and marks a sharp turnaround from the start of last year, when Britain seemed at risk of slipping back into recession.

However, there are doubts about whether this pace of growth can be sustained in 2014.

Growth in 2013 was largely driven by households saving less and spending more – a trend which cannot continue indefinitely and which the Bank wants to see replaced by stronger exports and more business investment.

Signs so far have not been encouraging. Britain recorded its biggest current account deficit since 1989 in the third quarter, and Bank figures on Friday showed the biggest fall in lending to businesses since 2011 in November.