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Services sector activity slumps in July

The dominant services sector shrank to its lowest level since December 2010 casting doubt on a recovery this year

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Activity in the services sector unexpectedly shrank last month to its lowest level since December 2010 just missing the point of economic slump, new data showed on Friday.

The latest data from the Markit/CIPS services purchasing managers’ index will raise doubts over whether the economy can recover from the deepening slump in output in the first six months of the year.

The index for the dominant services sector unexpectedly fell to 51.0 in July from 51.3 in June only marginally above the 50-mark that separates growth from contraction.

Coming on top of the weakest manufacturing figures in more than three years, and sluggish construction growth, the services PMI pushed Markit's composite measure of output growth in July down to 49.5 from 51.1 - its first contractionary reading since the depths of the financial crisis in April 2009.

"Although anecdotal evidence suggests that a number of temporary factors remain in play - poor weather in the first half of the month and pre-Olympics disruption were reported in some quarters - companies continued to indicate that underlying demand remains fragile," said Markit economist Paul Smith.

The economy shrank by 0.7 percent in the second quarter of 2012, extending a recession that started late last year as output wilts under the pressure of government austerity and the euro zone debt crisis.

Output is about 4.5 percent below its peak before the financial crisis - a worse track record than in other big economies.

Despite this, the services companies polled by Markit are more upbeat about the coming year, with their confidence index rising to 65.6 from June's six-month low of 64.3, and they increased hiring for an eighth successive month.

This reflects the one bright spot in economy - which experts struggle to reconcile with the grim GDP data - namely strong job creation since the start of the year, which has pushed the unemployment rate down to 8.1 percent.

Nonetheless, most Britons' mood is gloomy, according to consumer surveys, and the government's austerity cuts are increasingly unpopular.

Earlier on Friday, a leading macroeconomic think tank NIESR forecast that the economy would shrink this year, and that any meaningful recovery would remain elusive until 2014, as the euro zone crisis and government spending cuts weighed heavily on the country's prospects.


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