UK Service Economy Slows as Recovery Stumbles

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By Martin Baccardax | November 5, 2012 8:46 PM EST

Britain's services sector, the biggest portion of its economy, grew more slowly than expected in October, raising concerns that the recovery path for Europe's second-largest economy will remain uneven.

The headline figure for service sector activity last month fell to 50.6 last month, according to data providers Markit and the Chartered Institute of Purchasing and Supply, indicating the slowest monthly growth since December 2010. The number still holds above the threshold of 50, however, which generally marks the difference between growth and contraction. The Business Expectations sub-index also declined last month to 65.3, the lowest reading since June.

"The latest UK services PMI data provide a warning to those who saw the strong growth in GDP during Q3 as symbolising the start of a strong and speedy economic recovery," said Andrew Harker, an economist at Markit. "With activity rising at the weakest pace in close to two years, the broadly stagnant trend seen in official data over the year to date looks to have continued at the start of the fourth quarter. Although there are signs of improvements, panellists still referred to the fragility of both demand and confidence among clients. Competitive pressures were also highlighted, both by respondents and by the slight nature of output price inflation.

Britain exited recession last month with the strongest quarterly economic gain in five years, even as experts warn of an uneven path to recovery amid a global slowdown and the ongoing European debt crisis.

The Office for National Statistics said the UK economy grew by a full 1 percent in the three months ending in September, the strongest reading since the third quarter of 2007 and a sharp turnaround from the 0.4 percent contraction measured in the previous three-month period, which marked the deepest double-dip recession in a generation.

On an annual basis the economy is unchanged from last year's level of output. In effect, this means growth of just 0.2 precent in the final three months of the year will ensure that Britain avoids a full-year economic contraction.

Breaking down the individual components of growth, the ONS said industrial production rose 1.1 percent on the quarter, the strongest in two years, while the broader services sector advanced by 1.3 percent, the best performance in five years, according to the ONS data.

Construction output, however, remains weak, falling -2.5 percent from an already week -3 precent figure in the second quarter.

Celebrations to mark the Queen's Diamond Jubilee last quarter hived around 0.5 percent from GDP, according to the ONS, thanks to an extra holiday day in the month of June. The corresponding day's addition on the third quarter added the same amount to total output. Tickets sales and overall business activity related to the London Olympics likely added around 0.2 percent to overall GDP, the ONS said.

Britons will face significantly higher energy costs this winter after the nation's biggest supplier became the latest to announce a massive price increase that could complicate policy decisions by the Bank of England just as the economy emerges from recession.

EDF Energy, one of the country's biggest providers, will increase its home energy tariff by 10.8 percent from December, five times faster than inflation, just weeks after 6 percent and 9 percent price rises from rivals British Gas and RWE npower.

The increases come just as UK inflation eased to the slowest pace in nearly three years, according to the ONS, which warned the cost increases could hike the headline consumer price index in the coming months.  

Prime Minister David Cameron has also used the issue of mounting home energy costs to encourage the country's biggest providers to be mindful of their impact on the fragile recovery.

"Energy bills have increased by more than £100 for some people since this summer," the Prime Minister wrote in a blog published on the consumer website moneysavingexpert. "These price rises couldn't come at a worse time for consumers who are already feeling the pinch from rising petrol prices and the cost of the weekly shop."

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