U.K. Services Barely Grow as Contraction Risk Looms

U.K. services growth unexpectedly slowed in November as demand fell for the first time in two years, increasing the chance the economy will shrink again this quarter.

A gauge fell to 50.2, the lowest in 23 months, from 50.6 in October, Markit Economics and the Chartered Institute of Purchasing and Supply said in London today. The reading is barely above the 50 line that divides contraction and expansion. A separate report showed services growth in China slowed.

The U.K. economy is struggling to shake off a double-dip recession with the Bank of England forecasting a “zig-zag” pattern for economic output and predicting a contraction this quarter. Chancellor of the Exchequer George Osborne delivers his autumn economic statement to Parliament today as he tries to balance calls to provide more investment to spur the recovery and his commitment to the fiscal squeeze.

“Britain probably returned to contraction in the fourth quarter,” said Rob Wood, an economist at Berenberg in London who worked at the Bank of England until earlier this year. “The underlying picture is of an economy continuing to bounce along the bottom.”

The pound was little changed against the dollar after the report and was trading at $1.6097 as of 10:30 a.m. in London. The yield on the benchmark 10-year U.K. government bond rose 2 basis points to 1.83 percent.

‘Tough’ Climate

While the U.K. emerged from recession in the third quarter with growth of 1 percent, the strongest since 2007, recent data have been mixed. Markit reports this week showed that manufacturing and construction both shrank in November.

Economists had forecast that the services index would increase to 51, according to the median of 31 estimates in a Bloomberg News survey.

In the services report, Markit said that new business fell for the first time since December 2010 amid a “tough economic climate” and poor weather, while confidence dropped to the lowest this year. Still, employment rose, while companies raised prices for a second month as costs increased.

“The service sector ground almost to a halt,” said Markit chief economist Chris Williamson. This “adds to worrying signs that the economy faces a renewed slide back into contraction.”

Vicky Redwood, an economist at Capital Economics in London, said a weighted average of Markit’s three surveys indicates gross domestic product will fall this quarter. She forecasts a 0.4 percent contraction.

Euro Weakness

In the euro area, services and manufacturing output shrank for a 10th month in November, according to Markit, though by less than initially estimated. A composite index of both industries rose to 46.5 from 45.7, above an initial estimate of 45.8 published on Nov. 22.

Separately, China’s services industries expanded at a slower pace in November, damping hopes for a faster rebound in the economy after a seven-quarter slowdown. The purchasing managers’ index fell to 52.1 from 53.5 in October, HSBC Holdings Plc and Markit said. That contrasts with a government-backed gauge of services that rose to the highest level in three months in November.

In the U.S., growth in services industries probably slowed last month, economists said before a report later today. The Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the economy, was at 53.5, down from 54.2 in October, according to the median forecast in a Bloomberg survey.

Osborne’s Plans

As Osborne prepared for his autumn statement, the British Chambers of Commerce called yesterday for measures to boost company investment. The chancellor said this week it’s taking longer than planned to balance the public finances, suggesting he’ll say today he’s no longer on course to cut the burden of government debt in 2015 and may have to extend austerity for another year.

To spur economic growth, Osborne will say he is cutting 5 billion pounds ($8.1 billion) from government departments to pay for capital spending on transport, education and science. He will also outline plans to approve as many as 30 new gas-fired power stations to replace aging coal, gas and nuclear plants, people familiar with the plans said yesterday.

The chancellor’s statement, which will include new economic forecasts, comes a day before Bank of England policy makers announce their monthly decision. The Monetary Policy Committee will probably leave the target for asset purchases at 375 billion pounds, according to all 36 economists in a Bloomberg News survey. The bank will announce its decision at noon in London.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

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

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