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Service sector: what the economists say

Guardian Economics 3rd December 2009

Key Cips survey shows pace of recovery weakening but economists believe growth is being maintained

Vicky Redwood, UK economist at Capital Economics

"November's UK Cips/Markit report on services echoes the manufacturing report released earlier this week in suggesting that the pace of recovery could already be flattening off. Admittedly, the drop in the headline business activity index from 56.9 to 56.6 reversed only part of the previous month's rise.

"So the index is still pointing to decent quarterly growth of services output of about 0.7%. And even with the drop in the manufacturing balances in November, the surveys still suggest that the economy started to expand again in Q4 [fourth quarter].

"What's more, the new business and business expectations balance both picked up. And the survey stalled in June, only subsequently to resume its upward trend. Overall, then, the fact that the surveys dipped in November isn't, on its own, too worrying. But our concern is that tight credit conditions, a looming fiscal squeeze and further deterioration in the labour all prevent the recovery from maintaining momentum next year."

Richard McGuire, fixed-income strategist at RBC Capital Markets

"Although slightly softer than expected, today's survey remains comfortably in expansionary territory, thereby rubber-stamping expectations that the broader economy registered positive growth this quarter. This optimistic view is tempered, though, by the fact that these data have proven somewhat over-optimistic of late – the service sector having contracted by 0.2% q/q [compared with the previous quarter] in Q3 despite a string of expansionary surveys during the quarter.

"Nevertheless, we continue to expect a firmly positive growth print for the final quarter of this year, albeit with this being underpinned by an anticipated pick-up in retail demand ahead of the 1 January VAT hike. This tax effect will, however, simply serve to cannibalise growth from 2010."

Hetal Mehta, economic adviser to Ernst & Young Item Club

"The fall in the PMI [purchasing managers' index] for services is very small and does not suggest any significant deterioration in business conditions. Activity is still increasing at a very robust pace and new business is growing fast, which adds more weight to the view that the recession has ended.

"Going forward, consumers should help to boost the services side of the economy as they bring forward their spending ahead of the VAT increase and help pull overall economic growth into positive territory.

"However, given the divergence of survey results from the official data, there is reason to remain cautious. In any case, the recovery is not expected to be rampant since much of the support to the economy is short-term in nature, such as the car scrappage scheme and the turning of the stock cycle."

Colin Ellis, European economist at Daiwa Securities SMBC

"Just one data release in the UK today, but it was an important one: the services PMI for November. And today's headline figure followed the path set by the manufacturing number, falling back on the month, although the decline was less marked, with the index easing 0.3 points to 56.6.

"Beneath the headline data, the split seen in recent months persisted, with incoming new business and expectations both improving again last month, despite further falls in employment and selling prices. It remains to be seen which of these two trends proves most dominant over the coming months: whether stronger orders or weaker employment dominate domestic demand.

"However, the slight fall in the headline activity measure last month is a signal that the recovery cannot be taken for granted in the UK – and it is still likely to be a long, hard climb to get back to where we were."

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