September 3, 2010 / 10:20 AM / 9 years ago

UPDATE 1-UK Aug services PMI falls to 16-month low

* August services PMI drops to 51.3 from 53.1 (poll 52.9)

* Markit-UK PMIs point to Q3 GDP +0.5 percent vs Q2 +1.2 pct

* Sterling weakens, analysts see double-dip recession risk (Adds analyst and market reaction)

By David Milliken

LONDON, Sept 3 (Reuters) - British service sector activity grew last month at its slowest pace since April 2009, with a marked fall in hiring as employers worried about an economic slowdown and public spending cuts, a survey showed on Friday.

The headline Markit/CIPS services purchasing managers’ index dropped to 51.3 in August from July’s 53.1, a much sharper fall than the decline to 52.9 forecast in a Reuters poll.

The downbeat services reading follows bigger-than-expected falls in the PMIs for manufacturers and construction, though all are still above the 50 line that divides growth from contraction.

Markit said the three surveys suggested that British GDP growth slowed to 0.5 percent in the third quarter from a nine-year high of 1.2 percent the quarter before.

“While a double dip recession remains unlikely, the survey suggests that the risk has increased and that growth looks set to be slow and choppy going forward,” said Markit chief economist Chris Williamson, in similar language to that used last month by the Bank of England and finance minister George Osborne.

Sterling fell around half a cent against the dollar and a quarter of a cent against the euro after the data was published, though gilt prices were little changed.

Almost all private sector economists believe the previous quarter’s exceptional growth was a one-off caused by weather-related disruption in the first quarter, and the key question is how fast growth slows thereafter.

A stalling recovery in the United States and hefty public spending cuts in Britain and most of the euro zone mean many economists expect quarterly growth to slow to well below a trend rate of around 0.5 percent.

“This is basically confirming that Q2 GDP growth was a blip and it is pointing to negative quarter-on-quarter growth around the turn of the year,” said Alan Clarke, economist at BNP Paribas.

These fears have spread to the service sector companies in the PMI survey, which excludes retailers and public sector employers but not businesses reliant on government work.

The services PMI expectations component has barely risen from the 15-month low hit in June, and the employment component fell sharply to 46.9 from 49.7, touching a 10-month low. New business came in at its slowest pace since June 2009.

“Worries over the impact of government spending cuts and the scheduled rise in VAT early next year continued to undermine sentiment,” Markit said.

Osborne plans to raise value-added tax on most goods and services to 20 percent in January from its current rate of 17.5 percent, on top of budget cuts of 25 percent to most government departments over the next four years.

However, the survey brings good news for the Bank of England, which hopes the weak economic environment will enable inflation to fall back to its 2 percent target without the need for interest rate rises.

Competitive pressures and discounts to boost sales meant firms barely raised prices in August, with the increase the smallest since April. This was despite higher wage and utility bills causing firms’ costs to rise at their fastest since May.

Moreover, economists said it was important to distinguish between patchy growth — which the survey pointed to — and an outright return to recession, which the data did not yet predict.

“We aren’t expecting the recovery to be smooth and plain sailing. In the 1980s we saw lots of times recovery was strong in one quarter and patchy the next,” said Deutsche Bank UK economist George Buckley.

IT and computing was the strongest sector in August, while indices for the larger ‘business services’ category declined. (Editing by Toby Chopra)

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