Fragililty of recovery shown as private sector growth slips

A TRIO of economic reports is today casting doubt over the strength of the UK's recovery, with the Bank of Scotland warning that private sector growth north of the Border fell backwards during September for the first time in 15 months.

• George Osborne's review lands on 20 October. Inset, BoS figures show a sharp contraction after a period of growth Picture: PA

Data from accountancy firms Deloitte and BDO also signalled a downturn in businesses' confidence in the recovery.

Today's three downbeat surveys come in contrast to data released over the past fortnight by the Office for National Statistics and the Chartered Institute of Purchasing and Supply (Cips), which gave unexpectedly up-beat assessments of the services and manufacturing sectors.

But Bank of Scotland's headline purchasing managers' index (PMI) - which measures business activity - fell from 53 in August to 49.8 last month. Readings below 50 indicate contraction. The drop brought 15 months of continuous growth to an end.

Donald MacRae, the bank's chief economist, said: "The Scottish private sector economy has paused for breath after a slow but steady period of growth.

"While new orders and employee numbers remain on an upward trajectory, overall activity decreased during September."

Activity levels at both manufacturing and service sector firms fell during September, ending a four-month run in which both sectors had posted growth.

The declines contrasted with the trend seen across the UK as a whole, where continued expansion was registered. In Scotland, survey respondents linked the fall to weakening new order values and lower activity at clients.

The "pause" came as BDO warned that its plummeting growth forecast could "derail" next week's comprehensive spending review (CSR).

Chancellor George Osborne will announce where his axe will fall on public sector spending on 20 October.

But a report from BDO predicts that economic growth will grind to a halt in the first quarter of 2011 and that the economy will contract during the second quarter.

The firm said the UK government's predictions behind its CSR are for growth of 0.5 per cent in the first quarter and 0.6 per cent in the second.

BDO would not release a figure for the expected economic contraction in the second quarter, nor would it speculate on the third quarter.

Two consecutive quarters of contraction would indicate the economy was back in recession - the "double-dip" that many economists have been fearing.

Peter Hemington, a partner at BDO, said: "We are worried that it is already beginning to look as if the UK government's growth figures don't stack up."The key risk for the CSR is that economic growth is much more fragile than we thought a few months ago."

The firm also called on the Bank of England's monetary policy committee (MPC) to pump more money into the economy to stimulate growth.

Hemington added: "MPC member Adam Posen has called for a new injection of quantitative easing and we believe that he is right. 50 billion has to be injected in the economy before the end of 2010 to stimulate the growth we so desperately need."

A separate report from Deloitte also warns that optimism among chief financial officers of publicly-listed companies has fallen for the third consecutive quarter.

More than one-third now expect a double-dip recession, with optimism now at its lowest level for 18 months.