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UK services growth weakest in nearly 2 years in Oct - PMI

Monday, 5 Nov 2012 | 9:30 AM ET

LONDON, Nov 5 (Reuters) - Business in Britain's dominant service sector grew at the slowest pace in almost two years in October and optimism about the outlook waned, a survey showed on Monday, pointing to a fragile economic recovery.

Combined with a deeper contraction in manufacturing, the data contrasts with the strong economic expansion in the third quarter and recent upbeat retail figures and may make the Bank of England's monetary policy decision next week a close call.

The main Markit/CIPS Purchasing Managers' Index (PMI) for the service sector, measuring the change in business activity including income and chargeable hours worked, eased to 50.6 last month from 52.2 in September, holding just above the 50 line that separates growth from contraction.

It was the lowest reading since December 2010 and fell short of analysts' forecasts for a smaller dip to 52.0.

``The broadly stagnant trend seen in official data over the year to date looks to have continued at the start of the fourth quarter,'' said Andrew Harker, economist at Markit, which compiles the survey.

``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,'' he added.

Business sentiment remained solid, albeit at its weakest since June, with 42 percent of respondents forecasting a rise in activity compared to the 11 percent that predicted a decline.

After news last month that the economy grew by 1 percent from July to September, many economists revised their forecasts for the central bank's announcement on Thursday, expecting no extension of its government bond purchases for now.

However, many service providers said improvements in demand and their clients' confidence were only tentative, and growth in new business slowed slightly.

There was also evidence of pressure on firms' profit margins as their costs rose more than the prices they charged, with increases in energy, food and fuel costs as well as wages.

Firms reduced their headcount for the second month running in October, although less than in September.

A PMI survey last week showed that the British construction sector, which has been the main drag on the economy this year, eked out growth in October, but new work and employment shrank and builders remained cautious about future business.

Markit's composite index, which brings together all three business sectors, fell to the weakest level since July - when Britain had just exited recession.

The services survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants, but excludes the retail sector. (Reporting By Olesya Dmitracova; Editing by Hugh Lawson)