UK Service Sector Growth Slows to 19-Month Low

Britain's services sector - its largest, accounting for around three quarters of overall GDP - grew at its slowest pace for 19 months in July, according to private industry data, a worrying signal that the recession could continue into the third quarter of the year, despite forecasts of a bounce-back.

Heavy discounting to combat dampened consumer demand and rising input prices squeezed service sector margins, while wet weather and pre-London 2012 disruption also weighed heavily on firms, reported the Markit/CIPS purchasing managers index (PMI) survey for July.

"Slower growth of activity is somewhat disappointing following the disruption of the Queen's Jubilee in June," Paul Smith, senior economist at survey compilers Markit, said.

"Although anecdotal evidence suggests that a number of temporary factors remain in play - poor weather in the first half of the month and pre-Olympics disruption were reported in some quarters - companies continued to indicate that underlying demand remains fragile.

"Moreover, reflective of the difficult environment and ongoing market competition, service providers continue to reduce their output charges and, with input price inflation persisting, margins remain under pressure."

July's service PMI came in at 51.0. Anything over the neutral 50 figure represents growth, while anything below represents a contraction.

This caps off July's disappointing PMI data for the UK's economic sectors.

Manufacturing output sank to a deeper contraction when it plunged to a 38-month low in July as its PMI came in at 45.4.

New orders collapsed as demand slowed, particularly in the export market which saw its sharpest decline in new business since February 2009, with the uncertain eurozone crisis remaining the most significant drag.

UK construction output returned to marginal growth in July, at a PMI figure of 50.9, though very weak comparative data and another drop in new business orders dampens any optimism of a chance the crumbling sector is recovering.

Its continued collapse since the end of 2011 drove Britain into the worst double-dip recession for fifty years, but construction firms are hopeful of an increase in business over the year amid government infrastructure initiatives.

Markit said that taken together it is the first time All-Sector PMI has fallen below 50 for 39 months.

Official data revealed the UK economy contracted by -0.7 percent in the second quarter, with record rainfall and an extra day off for the workforce in the Queen's Diamond Jubilee celebrations dragging output and sales down by more than expected.

Many economists predict a return to growth in the third quarter because of the positive base effect, falling inflation, and a boost from the London 2012 Olympic Games.

Chancellor George Osborne announced a £9.3bn fiscal investment in rail infrastructure, to improve the network and stations across the country.

Osborne has also launched the UK Guarantees scheme which will see the taxpayer underwrite billions of pounds of major infrastructure projects that are ready to start in the next twelve months, but cannot find financing from the private sector because of risk-wary lenders.

These efforts by the government to pull Britain out of recession reveal the weakening position of its austerity programme of cuts to public spending, which it says are essential to balance the Treasury's budget and erase a deficit built up by the previous Labour government.

However as tax receipts fall, and the economy's output backtracks, the UK's debt-to-GDP level has rocketed to 66.1 percent - its highest rate in 42 years.

The Bank of England has made a big push in its own policy efforts to get the economy moving in the right direction.

It added £50bn to its quantitative easing target in July, bringing the programme's total value to £375bn.

Under the current quantitative easing programme, called the asset purchase facility, the Bank buys up gilts in order to improve market liquidity and put fast cash on the balance sheets of British businesses.

Its new credit easing schemes, designed to free up affordable lending to consumers and businesses, have also now started.

The Funding for Lending Scheme (FLS) sees banks offered cheap loans in direct correlation to the amount they lend to the real economy of consumers and businesses.

As a bank's lending to this sector of the economy increases, so does the value of discount rate loans they can access from the Bank of England.

Mervyn King, Bank governor, said that this offers a "significant financial incentive" for British banks to increase their levels of affordable lending.

A second scheme, known as the Extended Collateral Term Repo (ECTR), sees the Bank of England accept low-quality assets, such as credit card debt, as security in loans that have a cheap rate.

This means banks can borrow money more cheaply against bad collateral than they would be able to in the interbank lending market.