IMF assessment out of date: weakening service sector highlights growth risks

On Monday the International Monetary Fund (IMF) said the UK economy was improving steadily from recession and that it was strong enough to cope with the cuts in public spending and tax increases proposed by George Osborne. But their assessment is out-of-date. The economy was recovering prior to Osborne’s June budget, but growth has clearly weakened since then.

The latest indication that this is the case comes with today’s release of data for activity in the service sector in July. This shows a second consecutive monthly decline in output. As a result, total service sector output in July was just 0.4 per cent higher than at the end of last year.

Some sectors appear to be doing well. Hotels and restaurants have seen their output increase by 1.6 per cent over the last seven months, while output in business services and finance is up 1.1 per cent. But there has been a sharp fall in output in the transport, storage and communications sector.

At this stage, government output – about 30 per cent of total service sector output – has stopped increasing (in July it was at the same level as in December 2009). In coming months, as the public sector cuts begin to bite, it will start to fall.

The worry is that there is nothing to suggest that other sectors of the economy will accelerate to fill the gap. For all the IMF’s apparent confidence in the wisdom of George Osborne’s approach to deficit reduction, the risk that it will lead to a period of very weak economic growth remains high.