Big freeze stalls growth in service sector

Unexpected fall in activity index last month fuels fears of 'double-dip' recession

The recovery in Britain's services sector was derailed by the heavy snows last month, prompting fears that the economy could face the prospect of sinking into a double-dip recession.

The UK services purchasing managers' index compiled by the Chartered Institute of Purchasing and Supply (Cips) and Markit showed that while the sector still grew in January it was at the slowest rate for five months "as snow-related disruptions undermined activity and new business".

The results were disappointing coming shortly after a Cips survey showed manufacturing was growing at its fastest rate for 15 years and the contraction in its construction index declined.

The index showing business activity in the services sector marked a fall from 56.8 in December to 54.5. Cips' chief executive, David Noble, called it a "slightly downbeat start to the year for the services sector," before adding: "This may be a temporary blip caused by one-off events rather than signs of a double-dip recession, but we can't dismiss the possibility." The snow hit the sector "much more than manufacturing or construction, reducing the growth rates of activity and new business wins," he said. The survey put this down to manufacturers making up for lost production days, while service providers "simply saw fewer customers".

Employment fell for the 21st consecutive month, which Cips said was predominantly down to "natural wastage and the non-replacement of leavers". It said that companies made cuts where there was excess capacity, but added it was hearing some reports of hiring in response to sales growth.

The rise in VAT at the start of the year, as well as increased oil prices and the weak pound, prompted the highest increase in operating costs in 15 months. The tax on purchasing also drove output charges higher, the first inflation recorded for 15 months.

Howard Archer, the chief European and UK economist for IHS Global Insight, said: "The marked relapse in both services activity and in incoming new business in January will reinforce concern that the economy still faces a major challenge to develop significant, sustainable recovery after only crawling out of recession in the fourth quarter of 2009."

Yet businesses were feeling optimistic in January as expectations were at their highest for four months over hopes for a general economic improvement and new product launches, Cips said yesterday. This was partially tempered by fears that government spending cuts could dampen activity.

"We're still seeing a positive turnaround on a number of fronts," Mr Noble said. "Even with imminent tax increases and government spending cuts, confidence in the future is buoyant as wider economic pick-up is expected to offset any fiscal austerity to come."

This comes as the Bank of England's Monetary Policy Committee prepares to announce today whether it will close down its printing presses. Many economists believe the MPC will announce the end of quantitative easing, a programme that has pumped £200bn into the economy since March. Most also expect interest rates to stay at 0.5 per cent.

"The relapse in services sector activity in January is unlikely to prevent the Bank of England's Monetary Policy Committee from bringing its quantitative easing programme at least to a temporary halt tomorrow. However, there may very well be a split vote and we suspect that the committee will leave the door open to further action should recovery fail to develop," Mr Archer said.