Snow and cuts mean a slow start to 2011 for the economy

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The economy is suffering a "disappointing" start to the year as snow and the early impact of government spending cuts have hampered business activity, say the Chartered Institute for Purchasing and Supply (Cips).

The latest Cips survey of confidence in the service sector – accounting for around 70 per cent of the economy – reveals that the cold weather probably pushed the economy into contraction in December as the snow disrupted supplies and transport. This effect will have partially reversed the growth seen in October and November.

The Cips said: "The UK appears to be on course for disappointing growth in early 2011, especially as any rebound from weather-related disruptions will occur alongside January's increase in VAT."

Taken together with the more upbeat survey readings on manufacturing but downbeat evidence from the construction sector over the last quarter of 2010, the Markit research group, which conducts the survey for the Cips, say that the data is consistent with the economy expanding by 0.4 per cent in the last three months of the year. This would be down from 0.7 per cent over the July to September period, and 1.1 per cent in the summer months.

The Office for National Statistics will publish its first estimates of GDP growth on 25 January.

The Cips data implies modest growth of about 1.6 per cent over the year, after a fall of about 6 per cent in output during the recession. The economy is unlikely to return to its 2008 peak levels of production until the spring of 2012.

Fresh inflationary tendencies were also confirmed by Cips. Average cost inflation accelerated markedly in December to reach the highest level since September 2008. More than a fifth of the survey panel indicated that average input costs were higher than one month ago, with the hotels, catering and restaurants sector signalling the strongest inflation.

This will add some pressure to the Bank of England to raise interest rates sooner than anticipated.

The Cips says that the headline reading on confidence in the service sector stands at 49.7 in December, down from 53 in November and its lowest for almost two years. It suggests that the economy probably fell back during December, largely due to the unseasonal weather. Any reading below 50 indicates a contraction, and this month's was one of the sharpest on record.

A "composite" index covering the Cips surveys across the economy compiled by Howard Archer of HIS Global Insight would have a reading of 51.1, against 53.7 – barely in positive territory, and the lowest showing since the depth s of the recession in mid-2009.

Mr Archer added: "The survey reinforces our belief that the Bank of England will keep interest rates unchanged at next week's Monetary Policy Committee, despite rising inflation. We believe that most MPC members will want to see how the economy shapes up early in 2011 as the fiscal squeeze increasingly bites, starting with the VAT hike."

Apart from the snow, Markit argued that some of the recent economic weakness could be due to public sector cutbacks, actual and anticipated.

David Noble, the chief executive at the Cips, commented: "It was a gloomy end to the yearwith reports of reduced activity, falls in work backlogs, and less new business. Meanwhile, profits continue to be squeezed as input price inflation accelerated at its steepest rate in over two years.

"Fiscal tightening will continue to be a big theme in the coming year, particularly for companies reliant on the domestic market."