Britain's services sector almost ground to a standstill last month, dampening hopes that the economy is on the road to recovery.
The Markit/CIPS Purchasing Managers' Index (PMI) for the dominant services sector dropped to 50.6 last month from 52.2 in September, only just above the 50 mark that separates growth from contraction. It is the slowest pace of growth in almost two years and way below analyst expectations of a much smaller decline to 52.
The UK economy grew by 1% in the third quarter, pulling the UK out of the longest double-dip recession since the second world war. But economists warned that the figures were helped by a boost from the Olympics and a rebound from lost output as a result of the jubilee weekend.
Andrew Harker, economist at Markit, said:
The latest UK services PMI data provide a warning to those who saw the strong growth in GDP during the third quarter as symbolising the start of a strong and speedy economic recovery. Although there are signs of improvements, [companies surveyed] still referred to the fragility of both demand and confidence among clients. The expectation among firms is for activity to improve over the coming year, but the road to full economic recovery still looks to be a long one.
Some economists said the release pointed towards the UK economy shrinking again in the fourth quarter, raising the prospect of a triple-dip recession. Rob Wood at Berenberg Bank said:
With manufacturing output suffering from weak exports and domestic demand and the service sector flirting with contraction, a fall in GDP in the fourth quarter now looks most likely.
The data will reignite the debate over whether the Bank of England will expand the quantitative easing programme this week. Howard Archer of IHS Global Insight said:
While we just about still lean towards the view that the Bank of England will hold off from more QE for now and monitor how the economy is developing and what impact the Funding for Lending Scheme is having, it is looking an extremely tight call.
While new orders in the services sector did grow in October - largely due to overseas demand - they did so at a slower pace than in September and companies said incoming new business did not make up for the completion of existing projects.
For the second month running, service companies cut jobs in October. Archer said:
A second successive, albeit modest, drop in services employment in October is a warning sign that there is no guarantee that the recent remarkable resilience of the labour market can be sustained.
Companies reported rising costs but were reluctant to pass them on to customers as a result of strong competition. They did, however, say they remained optimistic that service sector activity will improve over the coming 12 months, with 42% of those surveyed forecasting higher activity over the coming year.