UK services recovery relapses

The UK service sector reported a drop in output in December, its first fall since April 2009, showing that the economy's growth had declined as the last year drew to a close.

The headline business activity index dropped from 53.0 to 49.7 though economists had expected that it would hold steady at November's reading of 53.0.

December’s UK CIPS/Markit report on services suggests that activity in the biggest part of the economy started to contract again at the end of last year, said Capita; Economics' Senior UK Economist Vicky Redwood in a note.

The drop in the headline business activity index from 53.0 to 49.7 took it below the 50 mark for the first time since April 2009, he noted. The outstanding business, new business and employment balances all fell. Admittedly, at least some of this is probably due to the snow, which disrupted travel and kept people at home. Indeed, it is notable that the business expectations balance rose. Accordingly, some rebound in activity is likely in January.

However, he says the economy ended last year on a rather weaker note than the recent upbeat manufacturing data have suggested.

What’s more, the latest Bank of England’s credit conditions survey indicates that the easing in credit conditions remains gradual at best, with lenders expecting only a modest increase in credit availability over the next three months. The current falls in bank lending could continue for a while yet.

David Noble, chief executive at CIPS, said: “A major worry is the situation in the housing market, which suffered its steepest decline in activity for 20 months. Proposed measures to further tighten regulations on mortgage lending may only serve to intensify this worry into a … more protracted year of concern.”

Meanwhile, the Chartered Institute of Purchasing and Supply (CIPS) survey showed on Thursday construction activity in the UK fell for the first time since February 2010.

CIPS’ seasonally-adjusted business activity index for the construction sector dropped from 51.8 in November to 49.1 in December, stoking concerns about the health of the sector even as more spending cuts are in the pipeline.