Services sector slowdown fuels double-dip fears

Double-dip recession fears were fuelled today as the UK's powerhouse services sector registered its slowest growth in more than a year during August.

The Chartered Institute of Purchasing and Supply's (CIPS) latest activity index - where a score over 50 signals growth - fell from 53.1 to a disappointing 51.3 last month, the biggest drop since May 2009.

Services firms are shedding jobs at the fastest rate since October last year while sales growth is at a 14-month low, CIPS added.

Chief executive David Noble said it was "too early" to predict a return to recession but added: "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 UK economy roared ahead at its fastest pace for nine years between April and June, but the latest survey adds to mounting evidence of a sharp slowdown for the remainder of 2010.

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

Based on surveys so far, CIPS forecasts overall growth of 0.5% between July and September - well below the 1.2% in the second quarter. It said the outturn could be lower still if the current trend continues in September's surveys.

Jonathan Loynes of Capital Economics added: "The fact that the surveys tend to lead the hard economic data by a few months means that GDP is still likely to post a reasonable expansion in the third quarter of the year.

"But should the surveys continue to weaken in the next few months, the threat of a renewed contraction in Q4 and beyond would become very real indeed."

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

Doubts over the impact of the spending review next month are also sapping 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," Mr Noble added.