Fears over public spending cuts as services expansion slows

4 August 2010

4 August 2010 | Lindsay Clark

Business activity growth in the services sector fell by a full index point in July, according to the Markit/CIPS UK Services Purchasing Managers’ Index (PMI).

Weak demand from the public sector is reported to have hit growth, as the services sector PMI came in at 53.1, its lowest level since June 2009, and down from 54.4 last month. However, it remained above the 50 mark, which indicates no change, for the 15th consecutive month.

“This month’s services PMI will undoubtedly raise questions about whether the economic recovery is running out of steam,” said David Noble, CEO of CIPS. “To see government spending cuts impact the sector so quickly is concerning given the bulk of cuts are still yet to come. The big question is whether the private sector can plug the big gaps left by the public purse.”

The survey of purchasing managers also revealed services firms reduced headcount during the past three months.

“The fall in employment is particularly disappointing and shows how quickly businesses will respond to worsening economic conditions – let’s hope this isn’t a trend we’ll see continue,” Noble said.

Paul Smith, senior economist at Markit and author of the UK services PMI, said: “The services sector provided a major boost to GDP in the second quarter, but the rate of expansion has slowed sharply in recent months, suggesting a far weaker contribution to economic growth in the second half of the year. Inflows of new business have exhibited a considerable loss of momentum, showing the weakest rise since the sector emerged from recession a year ago.”

Confidence in the sector had failed to rebound from the record fall that followed the public spending cuts announced in June’s emergency budget, he added.


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