UK service sector activity falls in December

Waiter at a restaurant in central London
Image caption The service sector makes up the bulk of the UK's economic output

Activity in the UK's services sector fell for the first time in two years in December, a survey has suggested, raising fears of yet another recession.

The PMI services index from Markit/CIPS fell to 48.9 in December, down from 50.2 in November. Any score below 50 indicates the sector is shrinking.

Markit blamed the surprise contraction on a fall in new business.

It said the numbers suggested the UK economy shrank by 0.2% in the final three months of 2012.

The UK emerged from a double dip recession last summer with growth of 1% in the three months to September.

"The first fall in service sector activity for two years raises the likelihood that the UK economy is sliding back into recession," said Chris Williamson, chief economist at Markit.

The last time the index was below 50 was in December 2010, when it stood at 49.7.

A slight reduction in incoming new business was cited as the main factor behind the fall, with a reluctance among business to commit to new spending, and budgets reportedly being tightened.

Confidence among purchasing managers remained at an 11-month low.

Mr Williamson said the data suggested that "underlying demand remains very weak and that activity may continue to fall in the new year".

'Continuing uncertainty'

The services sector is seen as a good indicator of the health of the wider economy as it accounts for about three-quarters of the UK's GDP.

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Media captionChief strategist at Mint Partners, Bill Blain, says the decline was a surprise to economists

The estimate of a 0.2% fall in GDP for the final quarter is worse than predicted by other forecasters.

Separate purchasing managers' indexes (PMIs) released earlier in the week indicated that the manufacturing sector had expanded last month, but that the construction sector had continued to contract.

"The underlying trend is one of continuing uncertainty," said David Noble, chief executive at the Chartered Institute of Purchasing and Supply.

"Businesses are holding back on investment, leading to falls in employment and increased levels of spare capacity. At the same time, costs are increasing and businesses are unable to pass these on because of competitive pressures."

In December, the government's Office for Budget Responsibility said it expected the economy to have shrunk by 0.1% in 2012 as a whole.

Bill Blain, chief strategist at brokerage firm Mint Partners, told the BBC the services sector data had come as a surprise, but warned against being too pessimistic.

"It has caught people out," he told the BBC. " [But] it's just as likely that we will see [the sector] recover quite quickly… especially in areas like financial services."

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