The dominant services sector picked up pace in December as companies saw more new business flowing in, a survey showed on Thursday, dampening fears that the economy is already back in recession.

However, according to a separate Bank of England survey, Britain's banks have warned that higher funding costs due to the euro zone debt crisis may hit lending in the first three months of 2012.



The UK CIPS/Markit report on services has followed the sister manufacturing report in improving in December -- but the recovery still appears to have ground to a halt in Q4, while today's Bank of England's credit conditions survey suggests that weak bank lending will continue to hold back the economy.

The headline business activity index of the services survey rose from 52.1 to 54, leaving it consistent with modest growth of services sector output. This follows improvements in both the manufacturing and construction PMIs earlier this week.

However, a weighted average of the surveys over Q4 as a whole points to overall GDP doing little better than stagnating (while the falls in industrial production and services output in October suggest that a contraction is still possible).

And while it is positive that the surveys were at least moving in the right direction at the end of last year, we doubt that this can last. Note that in today's credit conditions survey lenders reported a drop in demand in for credit from both households and businesses and said that euro area developments were likely to impact negatively on credit availability in the coming months.


I guess the PMI services is encouraging alongside the manufacturing and construction numbers we've had also this week.

It does suggest that, after what looks as if it could be a pretty poor fourth quarter of 2011, as if the economy has regained a bit of momentum going into 2012. And that probably means that even if the fourth quarter growth numbers are negative the UK could successfully skirt recession rather than go through another double dip.

So it looks as if the UK is going to get out of recession by the skin of its teeth to some extent and growth potential will be stronger in the first quarter of next year.


That's strong (but) on average for the quarter it's still down on Q3 52.5. For the composite PMI, that leaves us at 52.7, which is basically the highest since the middle of the year. It probably doesn't prevent a negative GDP in Q4 given what we already know from the monthly ONS services output data, but it does chime with a number of other indicators that suggest that we've probably already troughed. So yes, a pleasant surprise.


The manufacturing, services and construction PMIs have all surprised on the upside and offer some hope that there is still life in the UK economy. Indeed, this reduces the likelihood of a negative 4Q11 GDP reading, which is something we had been fearing, given the weak retail sector.

Nonetheless, the UK is still very vulnerable to the euro zone sovereign debt crisis given trade, financial and confidence linkages. Furthermore, confidence remains weak and real incomes are set to stay in negative territory throughout 1H12. Indeed, the services PMI show that business expectations are back down to 2.5 year lows and we doubt the UK will be able to avoid a return to recession, albeit a mild one.


Service sector companies reported surprisingly buoyant business conditions in December, with activity and new business growing at the strongest rates since July.

The December survey rounds off a reasonable fourth quarter for the service sector, which is likely to again provided the main stimulus to economic growth. Services are likely to have expanded by around 0.3-0.4 percent in the final quarter, down from 0.7 percent in the third quarter but offsetting a renewed downturn in manufacturing and sluggish growth of construction to help the UK avoid a slide back into recession, at least for now.

Looking ahead, however, companies grew increasingly worried about the coming year, suggesting that the upturn may prove short-lived as we move into 2012. Expectations of future business growth slipped to the joint-weakest since March 2009, with firms anxious about the impact of the Eurozone crisis and domestic austerity measures.

Uncertainty remains unusually high, and companies look to be hunkering down for a tough year in 2012, but the upturn in services activity in December provides some encouraging news that the UK economy is showing some resilience among the many headwinds that it is currently facing.

(Reporting by London bureau)