Services sector recovery ‘may be stalling’
Despite a return to growth in May, figures for June show that companies in the sector are still slashing jobs
Activity in Britain’s services sector grew for the second month in a row in June, but there are fears that the pace of recovery could be stalling.
The Chartered Institute of Purchasing & Supply (Cips) said that the services PMI index eased to 51.6 last month, from 51.7 in May, moving back towards the 50 mark that separates growth from contraction.
David Noble, Cips’s chief executive, 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.
“With many consumers’ purses staying firmly shut, those that rely most on consumer spending, such as hotels and restaurants, are really feeling the pressure.”
The service sector’s return to growth in May had fuelled hopes that the economy was bouncing back from the downturn. But today’s figures for June showed that companies in the services sector are still slashing jobs, despite signs that the worst may be over, with employment in the sector falling for the 14th month in a row.
“Purchasing managers reported a lack of new business opportunities in line with difficult market conditions. It is still very tough out there for most firms so it’s hardly surprising that jobs were slashed at an accelerated pace,” said Noble.
Howard Archer, chief UK economist at consultants IHS Global Insight, warned that the early signs of recovery seen in May could be choked off.
He said: “Not only did the rate of expansion slow marginally in June, but, more worrying for future prospects, incoming new business contracted anew in June (albeit modestly) while employment in the sector contracted at an increased rate.
“The modestly weaker services sector survey for June highlights the fact that economic and financial conditions remain very difficult, and relapses in activity are highly likely. This reinforces our suspicion that sustainable economic growth will not develop until 2010 and then only gradually.”
There was some more positive news, however, with business expectations rising to a 20-month high in June.
“Companies are now almost as optimistic as when consumers were busy beating down the doors of Northern Rock,” commented Colin Ellis, European economist at Daiwa Securities.
