Services sector heading south

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Date: Thursday 03 Jul 2008

LONDON (ShareCast) - Britain's services sector slowed sharply last month according to the latest survey from the Institute of Purchasing and Supply.

CIPS index of service sector activity fell to 47.1 in June from 49.8 in May, with economists suggesting it is further evidence of the UK economy sliding towards recession.

The survey followed a grim reading from the manufacturing side of the economy with June's Manufacturing Purchasing Managers Index (PMI) showing the fastest contraction in monthly activity since 2001.

Any figure below 50 shows a sector contracting and with services accounting for nearly three-quarters of activity economists said the figures would be a severe concern for the Bank of England.

“Purchasing managers in the UK services sector saw conditions deteriorate further in June as they battled against a combination of intensifying inflation and weakening demand,” Roy Ayliffe, director of professional practice at CIPS, said.

One of the major problems is banks reining in lending after the credit crunch and the problem is likely to get worse according to the latest loan conditions survey from the Bank of England as availability mortgages and loans to small businesses is likely to be cut back further.

A balance of plus 69% of those lenders asked believed that the poor outlook for house prices would limit mortgage availability over the next three months.

Corporate credit availability is also predicted to be lower over the next three months and default rates on loans expected to rise.

Financial institutions corporate debt spreads to widen in the next quarter, the Bank of England said.

"The impact of the tightening in terms of availability of credit could prove greater than is embodied in the central case in our most recent set of projections," deputy Governor Charles Bean told the Treasury Select Committee yesterday.

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