UK economy at risk despite services pick-up

Britain's economy remains at risk of recession despite a surprise pick-up in activity among services firms in December, as the spill-over from the eurozone crisis looms large and banks look set to tighten credit. The unexpected jump in the Markit/CIPS Purchasing Managers' Index (PMI) for the service sector to 54.0 in December from 52.1 the month before provides some hope that the country may just skirt a recession for now.
But the Bank of England's quarterly credit conditions survey - also released on Thursday - showed that banks expected to apply stricter credit criteria and saw credit demand dwindling across the board. With the eurozone debt crisis unresolved, and consumer spending under pressure from tough government spending cuts and soaring prices, the central bank is still expected to add more stimulus in the form of asset purchases soon.
The services PMI's rise to the highest level since July confounded expectations for a fall. The unexpected bounce comes after the construction PMI showed a slight pick-up in growth in December and the contraction in manufacturing slowed.
"The PMIs have all surprised on the upside and offer some hope that there is still life in the UK economy," said ING economist James Knightley. "Nonetheless, the UK is still very vulnerable to the euro zone sovereign debt crisis given trade, financial and confidence linkages," he said. "We doubt the UK will be able to avoid a return to recession, albeit a mild one."
Gilt futures fell slightly after the PMI data, though the improvement did little to change markets' views that the central bank will pump an extra 50 billion pounds of quantitative easing funds into the economy in February. The BoE predicts a stagnation until mid-2012, though some policymakers have warned the economy may shrink for one or two quarters. A slump in industrial and services output in October had indicated a weak start to the fourth quarter.
Finance minister George Osborne announced a scheme of credit easing in November, aimed at boosting lending to small and medium-sized firms, hoping to boost the economy while sticking to his plan of spending cuts to erase the budget deficit. The jump in Britain's services PMI follows more positive news from Britain's key export markets such as the eurozone. But, the expectations index of the British services PMI fell back to the 2-1/2 year low of 67.4 recorded in September.