From the TUC

Services growth slowing down

05 Dec 2010, by in Economics

Last week’s Purchasing Managers Index results were a bit of a roller coaster. The figures for manufacturing were record highs, with exports doing particularly well. The construction results were less good, with jobs being lost, but even so the index rose slightly when many people (me included) had expected a decline. Then Friday saw the figures for services, and these were not so encouraging.

Remember that services now account for over two-thirds of the UK economy, so these figures are the most important that came out last week. Markit described the figures – continued growth, but significantly lower than pre-recession levels – as “solid” but

pointing to sluggish expansion in the near-term, we expect the sector to make a reduced contribution to UK economic growth in Q4. Moreover, the sector’s present growth profile suggests it is unlikely to generate any meaningful job creation and help to offset expected employment cuts in the public sector.

I felt that last month’s Index of Services results – which continued a rise that began in February – were quite good, but these figures change the picture a little. Perhaps its fairest to say that services are doing ‘OK’, but not particularly great guns.

I’ve been more worried about the household sector recently and today’s Observer reports that the British Chambers of Commerce are going to downgrade their forecast for growth in 2011 from 2.2 per cent to 1.9 per cent because they fear that the cuts and the VAT increase are going to hit consumer and business confidence. They also expect unemployment to rise 150,000 next year but they expect stronger growth from 2012 on.

Overall, the picture is of continued recovery – which is important, some forecasts had the UK back in recession by now – but it doesn’t look especially strong. Even the organisations that support the government’s fiscal policies think that the cuts and the VAT rise will hurt the economy next year.

Most of these groups and individuals believe that lower public spending will free up investment opportunities for the private sector. The difficulty with this is that there’s not really very much evidence that public spending is stopping businesses getting finance. The British Banking Association says that, in fact, credit availability has improved and the reason lending to companies is down is their preference for paying off debt.

The other reason why some people hope the recovery will survive is their belief that the global recovery will continue. Most of the international institutions claim to believe this, but I wonder if there’s a bit of whistling in the dark going on here.  We are, after all, in the middle of a unique experiment: co-ordinated European deflation.

Will the global recovery (especially in India and China) be strong enough to outweigh large cuts in public sector demand in a majority of developed countries?

I don’t think so, but I hope I’m wrong.

One Response to Services growth slowing down

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    Dec 6th 2010, 12:47 am

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