Bloomberg News

U.K. Services Surge May Help Britain Avoid a Recession: Economy

January 06, 2012

(For more on Europe’s debt crisis, see EXT4.)

Jan. 5 (Bloomberg) -- Service industries in the U.K. grew at the fastest pace in five months in December and strengthened in the U.S., suggesting their economies are partly withstanding to the euro-area debt crisis.

A gauge of U.K. services activity based on the survey of purchasing managers rose to 54 from 52.1 in November, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. A U.S. services index rose to 52.6 in December from 52 the previous month.

The data suggest the U.K. economy strengthened in December after surveys earlier this week showed construction and manufacturing improved. Still, the euro-area crisis is clouding the outlook for the global recovery. The Bank of England said today banks may toughen loan terms because of the debt turmoil, hampering growth, while some Federal Reserve officials have said prospective economic conditions may warrant “additional policy accommodation.”

“There is still life in the U.K. economy,” said James Knightley, an economist at ING Group in London. “Nonetheless, the U.K. is still very vulnerable to the euro-zone sovereign debt crisis given trade, financial and confidence linkages. Furthermore, confidence remains weak.”

U.S. Improvement

The median forecast of 21 economists surveyed by Bloomberg News was for the U.K. services gauge to fall to 51.5. Services account for about 75 percent of the economy and a measure above 50 indicates expansion. Euro-area services and manufacturing output contracted less than initially estimated in December, led by Germany, a report showed yesterday.

In the U.S., the median forecast of 65 economists in a Bloomberg News survey was for the Institute for Supply Management’s index of non-manufacturing industries, which account for about 90 percent of the economy, to rise to 53. Another report showed the number of applications for jobless benefits fell last week.

Signs of economic resilience have helped to lift equities. The S&P 500 Index has surged 16 percent from last year’s lowest level on Oct. 3. Europe’s Stoxx 600 Index is up 15 percent from its 2011 low on Sept. 22.

Gloom Remains

In Australia, the services industry shrank for a third straight month as consumer spending weakened amid global financial turmoil spurred by Europe’s sovereign-debt crisis, a survey showed today.

Markit said in a separate statement that faster growth in U.K. construction and services last month wasn’t enough for Britain’s economy to expand in the fourth quarter, with gross domestic product forecast to have stagnated. Its composite gauge for manufacturing, services and construction recorded its weakest expansion since the second quarter of 2009 in the final three months of the year.

Today’s services report “significantly boosts hopes that the economy managed to avoid contracting,” said Howard Archer, chief European economist at IHS Global Insight in London. Still, “with manufacturing output clearly contracting in the fourth quarter and construction output likely to have expanded modestly, we suspect that gross domestic product was essentially flat.”

The outlook for both companies and households may darken further this year, with a Bank of England survey today showing that U.K. banks expect to toughen “credit-scoring criteria” on new mortgages and tighten covenants on loans to large and medium-sized companies. Developments in the euro area “and their impact on banks’ funding conditions would be a key determinant of credit availability over the coming quarter,” it said.

--Editors: Fergal O’Brien, Andrew Atkinson

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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