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UK Services PMI Hits 20-Month Low in Dec.

Large swathes of Britain's service sector suffered their first fall in output since April 2009 last month, a major survey showed on Thursday, pointing to a sharp slowdown in economic growth at the end of 2010.

British GDP probably grew by just 0.4 percent in the last three months of 2010, lower than many economists have forecast and barely half the 0.7 percent recorded in the third quarter of the year, survey compilers Markit said.

The Markit/CIPS services purchasing managers' index dropped to 49.7 in a December marked by unusually snowy weather, in contrast to economists' forecasts that it would hold steady at November's reading of 53.0. Readings below 50 indicate contraction.

Sterling weakened by more than half a cent versus the dollar on the news.

But the reaction on the government bond market was muted, and economists said the figures did not mean service sector contraction was inevitable in 2011, as activity bounced back strongly from similar weather disruption in early 2010.

"I'm a little surprised by the market reaction as I would have thought that it was fairly clear that the weather was going to have a substantial negative impact," said Stephen Lewis, strategist at Monument Securities.

"However, looming public spending cuts will have more of an impact on services than manufacturing so there probably is some underlying weakness creeping in there." Tuesday's manufacturing PMI survey showed the strongest activity growth in 16 years -- driven by strong export demand-- while Wednesday's construction PMI showed activity heavily disrupted by Britain's coldest December in 100 years.

Survey compilers Markit adopted a more downbeat view.

"This is a very disappointing end to the year," said Markit chief economist Chris Williamson. "UK economic growth is completely reliant upon export sales while domestic demand has wilted."

First Contraction in 20 Months

December was the first time the services PMI fell below 50 in 20 months. The survey covers businesses making up about 40 percent of the economy, and excludes retailers and the public sector.

However, evidence from retailers' post-Christmas earnings statements shows snow kept shoppers away, pointing to a weak contribution from retail too when official fourth-quarter GDP data is relased on Jan. 25.

Markit said anecdotal evidence suggested that December's weather was also the main factor behind the fall in the services index.

Another problem was the biggest fall in new business since April 2009, with public sector demand especially poor.

Global recruitment company Hays has reported particularly poor British performance as demand from the public sector for temporary staff melts away.

Service sector employment contracted for a third consecutive month "This continued to impact adversely on service sector business confidence which remained well below its trend level," Markit said.

Major public spending cuts planned for this year are weighing on the prospects of many private-sector service companies, while manufacturers are finally benefiting from the sharp fall in sterling in 2008 as the global economy recovers.

"Further weak economic growth should be expected in early 2011, and the drop in services activity, alongside the decline in construction, is a warning that manufacturing alone is unable to sustain the economic recovery," Markit's Williamson said.

One problem both manufacturers and service companies share is rising input costs.

Thursday's survey showed a rise in the services input price index to 60.5 from 57.1, its highest level since September 2008.

Manufacturing input prices rose in December at the fastest pace since the survey began in 1992.

Hotels and restaurants were the service sector suffering most from the rising cost of food and fuel, and also one of the worst affected by poor weather, alongside "personal services" such as hairdressing and domestic cleaning firms.

However, prices charged by businesses grew only slowly, which is likely to reassure the Bank of England that the dangers are limited for consumer price inflation, which is already more than a percentage point above target at 3.3 percent.

Separate figures from the BoE, also released on Thursday, showed that lenders expected credit availability to businesses and households to remain steady in the first three months of 2011.

Contact Europe: Economy

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