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The UK's powerhouse services sector contracted for the first time in 20 months during December after snow and public sector cuts impacted trading, new research has revealed.
The latest Markit/CIPS Purchasing Managers' Index (PMI) survey - where a reading above 50 indicates growth - slipped to 49.7 in December from 53 in November and also came in well below City expectations.
Arctic weather conditions were blamed for the first fall in new business since mid 2009, with hotels, restaurants, caterers and personal services bearing the brunt of the disruption.
However, there were also signs that Government cutbacks stunted growth, with the public sector a source of demand weakness in the services sector, which accounts for around 75% of the UK economy.
CIPS figures earlier this week showed the construction sector also slipped into decline in December, leaving manufacturing as the only part of the economy in growth during the month.
Chris Williamson, chief economist at Markit, said the economy as a whole "stagnated" in December and warned it cannot rely on manufacturing for its future growth.
Mr Williamson said: "A very disappointing end to the year in the service sector matches a similar deterioration in the construction sector.
"Bad weather undoubtedly hit service sector business in December but there are also clear signs that domestic demand has weakened as households and business continued to rein in spending. There is a strong indication that UK economic growth is completely reliant upon export sales while domestic demand has wilted."
He estimated GDP only grew by 0.4% in the final quarter of 2010, compared with 1.1% in second quarter and 0.7% in third quarter.
The survey also revealed that the number of people employed in the sector declined for the third month in a row and at a faster rate than in November. Prices increased at their fastest rate since September 2008 and businesses were not able to pass all of the rise on to customers because of weak demand.
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