U.K. service sector recovery continued to loss momentum with growth flagging to a sixteen-month low in August as employers shed more jobs owing to uncertain economic outlook amid tough austerity measures and the value added tax hike.
The headline seasonally adjusted Markit/Chartered Institute of Purchasing and Supply purchasing managers' index or PMI for the services sector slipped to 51.3 in August, the lowest in 16 months, from 53.1 in July. The score was also below the economists' forecast of 52.9.
A PMI reading above 50 suggests expansion in the sector and a reading below 50 indicates contraction. The index remained above the no-change mark of 50 for the sixteenth consecutive month.
"Stuttering growth is causing considerable disquiet in the services sector and doesn't bode well for employment levels," David Noble, chief executive officer at the CIPS said. "Though it's tempting to talk about a double-dip, it's too soon to predict a return to recession."
The rate of job shedding in private sector service companies picked up to the highest since last October with companies indicating a mixture of redundancies and the non-replacement of leavers. The rise in job losses results from firms' concerns over the outlook, Chris Williamson, chief economist at Markit said.
"The service sector is struggling to sustain momentum after a buoyant second quarter," the economist noted.
Uncertain economic climate has reduced the volume of new work received by British service providers in August, while the weakening in activity was seen as a general trend following a record growth in February. Latest data also showed that sales increased at the slowest pace in fourteenth month.
Meanwhile, amid economic uncertainties and public spending cuts, confidence among businesses remained historically low, despite a slight improvement in August. "Confidence about the year ahead has failed to recover from June's record drop, with public sector spending cuts and the looming VAT hike in January creating uncertainty over the future direction of the economy," according to Markit economist Williamson.
At the same time, input costs continued to rise in August and the rate of inflation accelerated to a three-month high during the month. However, the latest increase in costs remained lower than April's peak and below the series average. Respondents pointed to higher salaries and increased utility bills as the main sources of inflation. Competition and, very rarely, the need to offer discounts to stimulate sales growth prevented firms from passing on the higher costs to clients.
"This is a worrying report," Howard Archer, chief economist at IHS Global Insight, said. "Most of the more forward-looking parts of the survey were soft which does not bode well for activity in the coming months."
Though in the second quarter, the U.K economy grew at the fastest rate since the first quarter of 2001, the latest PMI data signal a possible easing in the growth rate. "As such, the survey is now pointing to little or no growth in the biggest sector of the economy," Jonathan Loynes, an economist at Capital Economics said.
"Should the surveys continue to soften over the next few months, the threat of a renewed contraction in the economy in Q4 and beyond will become very real indeed," Loynes noted.
Weaker services data followed similar readings from manufacturing and construction PMI surveys. Growth in the manufacturing sector slowed to a nine-month low in August with the manufacturing PMI dropping to 54.3 from 56.9 in July. Construction activity continued weaken for the third month and the PMI reading was 52.1, down from 54.1 in the previous month.
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