By Daniel Hunter

December’s Markit/CIPS UK Services PMI survey indicated a modest reduction of service sector activity, the first in two years, as incoming new work dropped marginally amid reports of a challenging trading environment.

Backlogs of work continued to be cut, while employment was little changed. Expectations for activity over the coming year remained historically muted.

The headline index from the survey — the seasonally adjusted Business Activity Index — recorded 48.9 in December, down from 50.2 in November. By posting below the 50.0 no-change mark that separates growth from contraction, the index signalled a modest reduction in UK service sector activity compared to one month ago. Latest data marked the first such fall since a snow-related contraction was seen in December 2010.

A slight reduction in incoming new business was the principal factor behind the fall in service sector activity. December’s decline followed a similarly sized decrease in November and marked the first back-to-back contractions of new work in the sector since mid-2009.

Panellists commented on a general reluctance amongst clients to commit to new business spend, especially at a time of relative economic uncertainty. Budgets were reportedly being tightened, with cost control also said to be a prominent factor depressing spending.

General uncertainty over the direction of the economy and the lack of client expenditure weighed on the sentiment of service providers during the latest survey period. Confidence was unchanged on November’s 11-month low in December.

These factors also had a negative impact on employment decisions, with a number of panellists choosing not to replace leavers, especially at a time of falling or stagnating new business volumes. Although only marginal, a net reduction in staffing numbers was recorded in December for the third time in the past four months.

“The first fall in service sector activity for two years raises the likelihood that the UK economy is sliding back into recession," Chris Williamson, Chief Economist at survey compilers Markit.

"The services PMI follows an equally disappointing construction survey for December, leaving manufacturing — which accounts for just 10% of the economy — as the only bright spot. Taken together, composite data from the three surveys posted its worst quarterly performance for three-and-a-half years, and are consistent with the economy contracting by approximately 0.2% in Q4.

“Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the New Year.

“The service sector is also cutting employment in the face of weak demand and an uncertain outlook suggesting unemployment may soon start to rise again as private sector lay-offs add to public sector job cuts.”

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