Service sector at three-year low

A “disappointing” slowdown in the powerhouse services sector suggested the economy slumped to its lowest ebb for more than three years in July.

The Markit/CIPS survey for services activity, in which a reading above 50 represents growth, came in at 51, down from 51.3 in May and its lowest reading for 19 months.

But following data earlier this week showing a worsening contraction in the manufacturing sector and only slight growth in construction, the combined reading for all three sectors showed a decline for the first time since April 2009, with a reading of 49.5.

Although some of the decline in the services sector was caused by wash-out weather and disruption in the run-up to the Olympics, the grim data will fuel fears that the UK may struggle to pull out of its double-dip recession, which is already the longest in more than 50 years.

The gloomy readings from the Markit/CIPS survey are particularly worrying because until recently they have been considerably more upbeat than official data provided by the Office for National Statistics.

Many economists have accused the ONS of underestimating the strength of the economy and have questioned its figures showing that GDP - a broad measure of the economy - has declined for three quarters in a row.

Markit chief economist Chris Williamson said temporary factors worsened the picture in July but he pointed to a steep loss in exports created by weak global demand.

The services sector, which accounts for some 75% of the economy, showed the weakest growth since heavy snowfall disrupted business in December 2010.

Paul Smith, senior economist at Markit, said the slower growth was "somewhat disappointing" because many economists had expected a bounce-back as demand recovered following the extra bank holiday for the Queen's Diamond Jubilee.

He said temporary factors could not be blamed for the figures, adding: "Companies continued to indicate that underlying demand remains fragile."

CIPS chief executive David Noble said most businesses expect things to get worse or stay the same over the next year.

The main bright spot in the survey was an increase in employment for the eighth month in a row, but backlogs of work fell at their fastest rate since November 2011.

Mr Williamson said job creation across the three sectors was its fastest for three months in July but warned the market will worsen if the economy continues to decline.

Vicky Redwood, chief UK economist at Capital Economics, said: "July's CIPS/Markit report on services was thankfully not as bad as the manufacturing survey released earlier this week. But it was not that good either.

"Even leaving aside temporary factors, the big picture is that the economy is still struggling to grow."

PA