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UK services slowdown ‘worst since foot-and-mouth’

• Services PMI slumps to 51.1 for August
• Fall worse than after Lehman collapse
• Pound falls to six-week low on news
• Eurozone data shows raised recession risk

Britain’s services sector has suffered its sharpest slowdown since the foot-and-mouth crisis of 2001, fuelling concerns that the dominant part of the UK economy is faltering.

Growth across the UK services sector slumped in August, according to a monthly survey of purchasing managers conducted by Markit and the Chartered Institute of Purchasing & Supply. The index, which measures activity across the sector, fell to 51.1 in August from 55.4 in July. This is the second-biggest fall on record – worse than in the weeks after the collapse of Lehman Brothers. It disappointed economists who had expected a reading of 54 points, rather than a result closer to the 50-point mark that separates expansion from contraction.

David Noble, chief executive of CIPS, described the drop in the services purchasing managers’ index as “eye-watering”. It sent the pound falling to a six-week low of .6103 against the dollar.

Markit said that the general economic uncertainty is hurting the UK services sector, leaving many companies struggling to generate new business. Some firms also reported that the riots that struck parts of the UK last month had also hit trading.

“Allied with soft manufacturing data and a slowdown in construction growth, the overall picture provided by the latest PMI surveys is one of a stuttering UK private sector,” said Markit’s senior economist, Paul Smith.

“Job losses were again reported as firms remain reluctant to replace leavers or are forced to cut positions in response to excess capacity,” Smith added.

Markit/CIPS also found that business confidence in the UK services sector was the lowest for a year. The survey found that worries over the impact of government spending cuts were also “depressing sentiment”.

Howard Archer, chief UK economist at IHS Global Insight, said the services data “really rings the growth alarm bells”.

He said: “The very sharp slowdown in activity in the services sector in August indicated by the purchasing managers’ survey is a particularly significant blow to the economy given the sector’s dominant role. Even allowing for any impact from the riots and a correction after a surprise spike up in services activity in July, this is a hugely disappointing survey. The only crumb of comfort is that it shows services activity is still expanding.”

A separate survey of the eurozone economy published on Monday showed that the risks of Europe slumping back into recession this year have increased. Growth in economic activity across the eurozone fell to its lowest rate in almost two years, according to Markit. The research group reported that the combined eurozone services and manufacturing PMI fell to 50.7 in August, with business optimism falling significantly in Germany, France, Spain and Italy.

Chris Williamson of Markit said that austerity measures and fears over the future of the eurozone are eating into economic demand, and could push the region towards a double-dip recession.

“The PMI suggests that economic growth in the third quarter of 2011 is unlikely to improve on the 0.2% seen in the three months to June, and a contraction in the final quarter looks a distinct possibility unless business and consumer confidence improve noticeably in coming months,” Williamson warned.

The Chinese services sector is also suffering, according to HSBC’s monthly PMI survey. It showed that China’s services companies grew at their lowest rate since the survey began in November 2005, at 50.6 in August from 53.5 in July. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds