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UK to skirt recession on service sector activity, though worries remain -UPDATE

Date: Thursday 05 Jan 2012

UK to skirt recession on service sector activity, though worries remain -UPDATE

The Markit/CIPS service sector purchasing managers´ index for the month of December has come in at 54.0 points, versus the 52.1 reading for the previous month.

The consensus estimate was for a reading of 51.5.

The final month of 2011 provided a positive end to the year for UK service providers as activity and incoming new business both rose at their strongest rates since July. There were reports that enquiry levels were up, with higher marketing and promotional work helping to drive growth, according to Markit.

Still, a number of panellists continued to report that the economic climate remained tough, reflected by continued margin pressure (costs again rose steeply while output charges were little moved). Interestingly, utility prices were reported to be a key driver behind input costs.

Also worth noting, the combination of strong competitive pressures and, in some instances, the need to offer discounts to stimulate demand which some service sector companies faced.

Markit also highlights that while growth was sustained in each month of 2011 it was generally at sub-trend rates.

Likewise, business confidence matched the two-and-a half year low seen in September as the uncertainties of the true impacts of the austerity measures and the Eurozone crisis, on future activity, weighed on sentiment.

Commenting on the data, Chris Williamson, Chief Economist at survey compilers Markit, is of the opinion that:

“(…) Services are likely to have expanded by around 0.3%-0.4% in the final quarter, down from 0.7% in the third quarter but offsetting a renewed downturn in manufacturing and sluggish growth of construction to help the UK avoid a slide back into recession, at least for now.

“Looking ahead, however, companies grew increasingly worried about the coming year, suggesting that the upturn may prove short-lived as we move into 2012. Expectations of business growth slipped to the joint-weakest since March 2009, with firms anxious about the impact of the Eurozone crisis and domestic austerity measures.

“Uncertainty remains unusually high, and companies look to be hunkering down for a tough year in 2012. However, the upturn in services activity in December provides some encouraging news that the UK economy is showing some resilience among the many headwinds that it is currently facing.”

Economists at Barclays Capital, for their part, have written to clients that, “The improvement in the services PMI index provides a positive end to Q4 and is significant given that the index covers over 40% of the UK economy. Furthermore, it is encouraging that the survey strength appears be broadly based, with improvements noted in business activity, new orders as well as the labour market. Nevertheless, the apparent resilience of the services sector seems rather puzzling against the backdrop of deteriorating macroeconomic conditions for the UK and in the face of the profit squeeze suggested by other parts of the survey. However, despite the improvement in all three PMI surveys at the end broadly flat in Q4, which is in line with our current forecast.”

AB

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