The UK’s key services sector has shrunk for the first time in two years taking making economists by surprise and raising the prospect that the nation’s economy contracted in the final quarter of 2012 and could be heading downwards toward a triple dip recession.
The Markit services Purchasing Managers Index (PMI) slipped to 48.9 in December its lowest reading since April 2009 and down from the 50.2 reading recorded in November. Most economists had been expecting a small rise.
“The PMIs point to an economy that is contracting modestly,” said Rob Wood, an economist at Berenberg Bank.
“A big thing that is not often picked up … is that future business expectations remain very weak,” he added. “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.”
The UK economy has struggled to recover from the 2008-09 financial crises which saw the nation’s economy shrink by 6.3%. Output still remains 3% lower than its 2008 peak leaving it in a far worse state than many other major economies. The UK continues to be buffeted by the fallout from the Eurozone crisis and the weak economy in the United States and Asia, weak leadership from its own government has also not helped the situation.
As a result of the weak PMI the Pound has slumped to its lowest level in three-weeks against a broadly strengthening US Dollar. Adding to the gloom 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.
There have been partial signs that bank lending may be starting to improve things, 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.
“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.
It’s difficult to see how the UK will get itself out of the doldrums and back to prosperity as the current Chancellor George Osborne continues with strict cost cutting measures, other economists however, such as Rob Wood are looking on the bright side;
“As we head into the second half of the year, we still expect the UK to return to gradual growth, in part as credit conditions ease with the Funding for lending scheme,” he said. “Today’s (mortgage approval) figures are one positive indication of this. Fragile but stable is how I would describe the UK economy.”
The Pound to Euro exchange rate is currently trading at 1.2293
The Pound to US Dollar exchange rate is currently trading at 1.6034
The Pound to Australian Dollar exchange rate is currently trading at 1.5345
The Euro to US Dollar exchange rate is currently trading at 1.3040
The Euro to Pound exchange rate is currently trading at 0.8132
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