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UK service sector contracts at slower pace in January

BRITAIN'S dominant services sector contracted less sharply than expected last month but firms slashed prices and laid off workers at a record pace, a survey showed today.

The figures mirror the trend in manufacturing earlier this week, and suggest that while the economy may have passed through the sharpest phase of the credit crunch, the spiral of job cuts and falling demand may have much further to run as firms dig in for a prolonged recession.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index picked up to 42.5 last month from 40.2 in December. That was well above the consensus forecast of 40.4 and the highest reading since September, the month Lehman Brothers filed for bankruptcy protection.

While most components picked up from record lows hit at the end of last year, they remained consistent with further falls in output and are unlikely to deter the Bank of England from taking further steps to shore up the economy.

The services sector makes up around three-quarters of Britain's economy and has held below the 50 mark which separates growth from contraction since May.

"While improvements in the activity and new business indices are encouraging, the sector remains in a very weak state," said Paul Smith, senior economist at Markit Economics.

"Companies are increasingly using discounting strategies in a desperate bid to stimulate demand and jobs are being slashed at a record rate."

Unprecedented cuts in interest rates and tumbling energy costs have both given firms some cheer but the macro-economic backdrop remains bleak.

Unemployment in Britain rose to almost 2 million at the end of last year and could top 3 million in 2010, according to Bank of England monetary policy committee member and labour market expert David Blanchflower.

Even if interest rates are cut to 1 percent tomorrow, as most economists expect, borrowing costs faced by businesses may not fall.

"There were many reports that the economic climate remained extremely difficult and that business pipelines had dried up," the survey noted.

"Respondents commented on a lack of confidence in product markets and that clients were reluctant to commit new business spend given recession, reduced budget positions and the uncertain climate."

Surveys of Britain's manufacturing and construction sectors earlier this week have pointed to a similar picture of continued contraction but at a slower pace.

Markit said the figures, taken together, suggested the economy was contracting at an annual rate of more than 2 percent.


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