New fears for recovery as services slow

Having bounced back strongly in January after the effects of the December snows and the worst winter in a century, growth in the service sector slowed in February. And the latest readings on activity suggest that official and Bank of England estimates for expansion in the first quarter of the year may prove difficult to achieve.

The Chartered Institute for Purchasing and Supply's index of activity in the service sector of the economy – comprising about 70 per cent of total GDP – fell back to 52.6 last month, below consensus expectations, and a slippage of about 1.9 points on January. A figure above 50 indicates growth.

Although a decline had been anticipated, the weakness of the expansion in output in services stands in sharp contrast to the continued bullish evidence emerging from the manufacturing sector, though that accounts for only one-eighth of UK economic activity. Longer-term expectations in the services sector are more optimistic.

Overall, the institute said the economy showed a "solid pace of expansion" in February, "holding up well" on the sharp upturn seen in January. The combined index of the manufacturing,construction and service sectors fell from January's eight-month high of 56.2 to 55.2, thereby remaining well above the no-change level of 50.

Manufacturing output recorded the strongest growth in the near 20-year history of the survey in January, and the pace slowed only marginally in February. Construction has meanwhile recovered sharply from the weather-related contraction seen at the end of 2010, expanding at the fastest pace for eight months in February.

By those standards, the service sector was relatively subdued, continuing to expand in February, but at a slower rate than January.

The institute adds there was now "further robust growth... suggesting GDP will have recovered in the first quarter from the decline seen in the final quarter of last year. However, the rebound flatters the rate of expansion and the underlying trend is likely to have remained weak as fragile consumer demand offsets manufacturing expansion".

A figure of 0.5 per cent growth in GDP for the first three months of the year is forecast by the institute – broadly repairing the 0.6 per cent fall recorded by the Office for National Statistics over October to December.

But taking the six months form October to March together, the chances are that the economy will be left broadly flat and perform much more feebly than the Bank or the Office for Budget Responsibility have forecast.

It also promises to be a relatively sluggish pace for this stage of an economic recovery in historical terms, and may not be far off the "double dip" scenario painted by the pessimist.

In line with other surveys in recent weeks, the institute also confirmed mounting inflationary pressure from soaring commodity prices.

Vicky Redwood, senior UK economist at the think-tank Capital Economics, said: "We doubt that this survey clarifies the picture for those Monetary Policy Committee members who said in February they wanted to wait to see whether or not the decline in GDP in the fourth quarter presaged sustained economic weakness."