Services sector suffers worst performance in eight months

The powerhouse services sector suffered its worst performance in eight months in June, a closely-watched survey said, fuelling fears the UK remains stuck in recession.

The Markit/CIPS survey for overall services activity, in which a reading above 50 represents growth, came in at 51.3, down from 53.3 in May and its lowest reading since October.

Chris Williamson, chief economist at Markit, said it was one of the worst performances since the recovery began three years ago and showed signs that the sector's 18-month run of growth was in danger of stalling.

The Queen's diamond jubilee disrupted trade while new business slowed as the eurozone debt crisis sent confidence to a six month low and traders feared a post-Olympics lull.

With data earlier this week showing the manufacturing and construction data were both in decline in June, James Knightley, an economist at ING Bank, said the data suggested the UK's double-dip recession continued in the second quarter of 2012.

Mr Knightley thinks GDP for the second quarter of 2012 will be flat to modestly lower.

The Bank of England is now widely expected to order a further £50 billion to be pumped into the economy through its quantitative easing scheme tomorrow on top of the £325 billion already sanctioned.

Mr Williamson added: "A steep drop in service providers' expectations about the year ahead also casts a gloomy shadow on prospects for the sector in the short term.

"The services PMI probably cements the case for further stimulus from the Bank of England, with the three surveys now collectively down firmly into territory that has triggered action from the Monetary Policy Committee in the past."

Employment levels in the sector rose for the seventh month in a row, but the expansion was only modest.

The prices charged by services companies fell amid discounting and a lack of demand.

This put profit margins under pressure, with operating costs driven up as rising energy, labour and travel prices more than offset lower fuel costs.

Howard Archer, chief economist at IHS Global Insight, predicts a 0.1% fall in GDP in the second quarter of 2012, following declines in the two previous quarters.

He said: "Even allowing for the fact that services activity was likely held back significantly in June by the two-day public holiday at the start of the month, this looks to be a fundamentally soft survey."

PA