Service sector: what the economists say

A sharp slowdown in Britain's service sector, which makes up two-thirds of the economy, has triggered fresh fears of a double-dip recession. Here is what the economists made of the data. Alan Clarke at BNP Paribas The services sector survey made grim reading. In combination with the manufacturing sector survey (which fell by almost three points earlier in the week) these surveys are pointing to negative GDP around the turn of the year. That may actually prove to be too optimistic since these surveys don't include government – which we know is going to be punching well below its weight. Overall, a disappointing report and reinforces the likelihood that the economy will begin to contract in the not too distant future. Jonathan Loynes, Capital Economics August's CIPS/Markit report on services echoes the sister reports on manufacturing and construction already released this week in signalling a sharp slowdown in growth across the economy. After the falls also seen in the manufacturing and construction surveys, our composite index suggests that the overall economic recovery has now pretty much ground to a halt. The fact that the surveys tend to lead the hard economic data by a few months means that GDP is still likely to post a reasonable expansion in the third quarter of the year. But should the surveys continue to weaken in the next few months, the threat of a renewed contraction in Q4 and beyond would become very real indeed. Hetal Mehta at Daiwa Capital Markets The services sector has been gradually winding down since February and today's data gives reason to be gloomy about the outlook. The further decline in employment also suggests that the labour market will be slow to improve, particularly with more public sector job cuts on the way. The services sector is key to the performance of the economy, and with this slowdown gathering pace, combined with the disappointing manufacturing PMI reading, it is clear that the remainder of this year will see subdued growth. And while it may still be a little premature to say that the economy will experience a double dip, the risks are increasing. Chris Williamson, chief economist at Markit The service sector is struggling to sustain momentum after a buoyant second quarter. Growth in August is the weakest in 16 months. Our model based on the three PMI surveys up to August is signalling a GDP increase of 0.5% for the third quarter, meaning the second quarter 1.2% surge in GDP will represent a peak in the recovery cycle. Disappointingly, the rate of job losses in private sector service companies has picked up sharply again to the highest since last October, as companies remain worried about the outlook. Confidence about the year ahead has failed to recover from June's record drop, with public sector spending cuts and the looming VAT hike in January creating uncertainty over the future direction of the economy. While a double-dip recession remains unlikely, the survey suggests that the risk has increased and that growth looks set to be slow and choppy. David Noble, chief executive of the Chartered Institute of Purchasing & Supply Stuttering growth is causing considerable disquiet in the services sector and doesn't bode well for employment levels. Though it's tempting to talk about a double dip, it's too soon to predict a return to recession. But, the lowest growth rate in the services sector for over a year does seem to reflect what's been happening elsewhere in the economy. Austerity measures and the upcoming increase in VAT appear to be weighing down on confidence. The next three months will be critical. Competition for new business will be fierce as companies contend with the pressures of higher costs, overcapacity and a "wait and see" attitude from buyers. These are tense times. Howard Archer at IHS Global Insight The purchasing managers' survey for August deals a significant blow to growth prospects, showing activity in the dominant services sector slowing to a 16-month low. Moreover, it follows the markedly weaker manufacturing and construction surveys, thereby heightening concerns that economic activity is faltering. The purchasing managers' survey heightens concern that the recovery is coming under increasing pressure from the fiscal squeeze. In addition, slowing global growth is a concern. It is clear that Q3 quarter-on-quarter growth will be substantially below the 1.2% in Q2. The key question is: just how much slower? Our currently forecast is 0.5%, helped by resilient consumer spending, but the downside risks to this forecast are mounting. The survey makes it a nailed-on certainty that the Bank of England will keep interest rates at 0.5% on Thursday. Indeed, it adds to the pressure on the Bank of England to revive quantitative easing.