'Two-speed recovery' fears amid service industry growth

3 June 2010

3 June 2010 | Lindsay Clark

The UK service sector continued its modest growth in May, but a slowdown in new business is causing concern, according to the Markit/CIPS Services Purchasing Managers’ Index (PMI).

The headline seasonally adjusted business activity index for the service sector, where 50 indicates no change on the previous month, recorded 55.4 in May, slightly higher than 55.3 in April.

Although levels of incoming new business continued to rise during May, the rate of growth slowed further from February’s two-and-a-half-year peak.

There were some reports that the general election outcome and worries over the strength of the economic recovery had resulted in client uncertainty and the deferral of spending, according to the study. Where new contract wins were recorded, anecdotal evidence pointed to promotional activities and the launch of new products as sources of growth.

Paul Smith, senior economist at Markit and author of the UK Services PMI, said in a statement: “On the surface, the headline index suggests that the dominant service sector expanded at a solid clip in May and remains on course to make a reasonable contribution to second-quarter GDP.

“However, the devil was in the detail, with weaker trends in new business and employment raising questions over the sector’s ability to maintain its current level of growth in the second half of the year.”

Commenting on the report, David Noble, chief executive of CIPS, said: “Whilst on the surface, the recovery of the UK services sector continued at a steady pace, a look under the bonnet reveals some worrying signs and raises concerns about the prospect of a double-dip recession.”

Noble also said that business service providers were faring better than consumer-facing firms. “It’s worrying that we’re starting to see a two-speed recovery. The impending public sector spending cuts and likely tax rises will no doubt hit both of these areas hard.”

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