UK service sector contracts in June

Jul 3 2009 By Andrew Mernin

Hopes that the economy slowdown is bottoming out have been dampened by new research showing recent progress in the services sector stalled during June.

The Chartered Institute of Purchasing and Supply’s (Cips) services survey saw an overall activity index of 51.6 - down from last month’s 51.7 when the sector notched its first month of growth since April last year.

The figures saw a slight fall in new business levels and Cips said job losses in the sector continued at a ``severe" rate.

Cips chief executive David Noble said: ``The services sector is showing signs of life but it is still too early to tell if this is the start of a full blown recovery.

``Consumer spending remains fragile and firms are being forced to slash prices in order to attract customers, even though their input costs continue to rise."

The UK economy contracted by 2.4% in the first quarter of 2009 - the biggest fall in more than 50 years - but recent surveys have pointed to stabilisation in the manufacturing and service sectors, as well as the house market.

The services sector has a huge impact on official gross domestic product (GDP) growth figures, because of its pivotal place in the economy.

The 2.4% slump was much more than expected, with much of the contraction driven by an acceleration in the decline in services.

The sector, which saw output fall 1.6% from a drop of 0.8% the previous quarter, was pushed lower by a significant drop in business services having been hit hard by the banking crisis and credit crunch.

Capital Economics said the recent findings from Cips were consistent with services sector growth of 0.4% in the second quarter.

Vicky Redwood, UK economist, added: ``The big picture is still that the rate of economic contraction has eased markedly. But it could be some time yet before we start to see decent rises in output."

Cips said employment in the services economy fell for a 14th successive month, with the rate of contraction being steeper and slightly faster than in May.