From the TUC

Bad news on services

06 Jan 2011, by in Economics

Today’s Purchasing Managers’ Index for services results are very disappointing. In a replay of what happened last month, very good news on manufacturing has been followed by less good news on construction and services – with the latter particularly important, as it accounts for two thirds of our economy. Today’s figures show new business and activity in services both falling in December and employment falling for the third month in a row. The overall activity rate fell from 53.0 to 49.7; strictly speaking, this means a decline in output, but it is probably better read as standing still.

The comments from Chris Williamson, the Chief Economist at Markit (which compiles the survey) were frankly alarming:

From the three PMI surveys, there is therefore a strong indication that UK economic growth is completely reliant upon export sales while domestic demand has wilted. … Expectations regarding business activity in the coming 12 months remain at a level which tends to be associated with economic crises and falling activity. Further weak economic growth should be expected in early 2011 and the drop in services activity, alongside construction, is a warning that manufacturing alone is unable to sustain the economic recovery.

Continued recovery depends upon successful service businesses: the results from manufacturing are encouraging, but successive governments long ago let British industry shrink to the point where it can no longer sustain the economy by itself. Markit indicated that the poor weather will have been a factor as hotels, catering & restaurants and personal services were particularly affected, so it’s too early to say we’re all headed to hell in a handbasket. I still expect service sector investment and output to grow, but they do have to grow enough to compensate for falling demand from households and government.

Markit’s press release notes that:

A number of panellists also continued to comment on a reluctance amongst clients to commit significant new business spend, with the public sector again noted as a source of demand weakness. This continued to impact adversely on service sector business confidence which remained well below its trend level.   

Let’s hope that it really is a matter of ‘seasonal factors’ and that things are about to improve. The Office for National Statistics’ Index of Production results, due on 25 January, will give us a chance to check up on this, but if it carries on like this even someone who agrees with the government’s austerity strategy would say it’s sensible to have a Plan B worked out.