Services woe fuels fears UK is heading for double dip

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The Independent Online

Activity in Britain's dominant services sector plunged at its fastest rate for more than a decade last month, raising fears that the economy is grinding to a halt.

The Markit/Cips services purchasing managers' index (PMI) registered its biggest-ever fall apart from April 2001, when the foot-and-mouth crisis hammered British agriculture and knocked tourism.

Markit said the services slowdown sent its all-sector index into territory indicating a near-stagnation in the economy. Growth in the third quarter could be worse than the anaemic performance for the second quarter, and Britain could slip back into contraction by the end of the year, it added.

Services such as hotels, travel, law and accountancy are vital for economic growth because they account for about three quarters of GDP.

Paul Smith, the senior economist at Markit, said: "The underlying growth profile of the [services] sector has weakened in recent months."

Markit warned: "Allied with soft manufacturing data and a slowdown in construction growth, the overall picture provided by the latest PMI surveys is one of a stuttering UK private sector."

Economic uncertainty and slowing new sales were the main reasons for the drop in services business, though Markit said August's riots in English cities may have had an impact.

However, the index remained above 50 – the mark that divides growth from contraction.

The services figures do not include Britain's ailing retail industry, though further evidence emerged yesterday that this part of the economy is also continuing to slow.

Retail sales fell 0.6 per cent in August as fragile confidence prompted shoppers to rein in spending on discretionary items such as shoes and homeware despite steep discounts, according to British Retail Consortium (BRC) figures.

Stephen Robertson, the BRC director general, said: "Sales of big-ticket items are very dependent on discounting and many retailers' margins are being cut to the bone."