The broader economy contracted in late 2012 and could be headed for its third recession since the financial crisis. The Markit/CIPS services Purchasing Managers’ Index dropped to 48.9 in December – its lowest reading since April 2009 – from 50.2 in November, confounding many economists’ forecasts for a small rise.
A reading below 50 indicates that activity shrank. The PMI data pointed to a 0.2% quarterly fall in Britain’s economic output in the final three months of 2012, and raised the risk of a further drop in the first three months of 2013, which would put Britain in its third recession in four years.
“The PMIs point to an economy that is contracting modestly. A big thing that is not often picked up … is that future business expectations remain very weak. It would not be a surprise to see recorded output fall in either, or both, of the fourth quarter of 2012 or the first quarter of 2013,” said Rob Wood, an economist at Berenberg Bank.
The country faces headwinds from weak demand in the euro zone, its major trading partner, as well as the UK government’s austerity drive and a financial sector that is much less willing to lend than before the crisis.
There have been partial signs that bank lending may be starting to improve, with Bank of England data on Friday showing the highest number of mortgage approvals since January, though levels are still far below those seen before the crisis.
In August the BoE opened a Funding for Lending Scheme which offers banks cheap credit if they keep up or increase lending, and Wood – a former BoE economist – said this should help the economy later in 2013.
Economists polled by Reuters early in December expected Britain’s economy to grow by 1.1 percent in 2013 after contracting 0.1 percent in 2012.
This survey indicates that Britain’s economy has contracted again, just three months after it left its last recession.
December was the first time the services PMI has fallen below the 50 mark that separates growth from contraction since December 2010, when unusually heavy snow disrupted business, though official services data have shown falls since then.
The services sector new business index dropped to 49.4 from 49.6, hitting its lowest level since December 2010, while employment also fell and the rate of price increases slowed.
“Market conditions were subdued, with client budgets being tightened towards the end of the year. There was evidence that clients were holding back from committing expenditure, preferring instead to focus on cost control at a time of ongoing economic uncertainty,” Markit said.
The services survey covers firms in the transport and communication, financial and business services, computing, hotels and restaurants sectors, but does not include retailers or public sector services.
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