U.K. Consumer Confidence at Four-Year Low, Services Contract

By Brian Swint and Jennifer Ryan

Sept. 3 (Bloomberg) -- U.K. consumer confidence stayed at a four-year low in August and services from banks to recruiters shrank as the country edged closer to a recession.

An index of shoppers' sentiment held at 52, the lowest since the survey began in May 2004, Nationwide Building Society said today. While the Chartered Institute of Purchasing and Supply's index of services growth unexpectedly increased today, it still held below 50 for a fourth month, indicating contraction.

The economy stagnated in the second quarter as banks pared lending and higher oil prices forced Britons to spend more on fuel, choking off households' spending. The Bank of England will probably still keep the key interest rate unchanged tomorrow after inflation accelerated to the fastest in a decade.

``Sometime in the middle of the year the economy went into recession,'' said Willem Buiter, a former Bank of England policy maker, in a Bloomberg Television interview today. ``The uncertainty'' about the economy and inflation ``is so great that there is no compelling case for raising or cutting rates.''

The pound was little changed today, trading at $1.7728 as of 10:39 a.m. in London. The U.K. currency has fallen 12 percent since July 15 after Britain's economy stalled in the second quarter, ending the nation's longest stretch of expansion in more than a century.

Chancellor of the Exchequer Alistair Darling said in an interview with the Guardian on Aug. 30 that the downturn would be more ``profound and long-lasting'' than he previously expected.

Services Outlook

Today's CIPS report nevertheless contained some positive signs. The main gauge of services activity rose for a second month, climbing to 49.2 from 47.4 in July, and exceeded the median forecast of 47 in a Bloomberg survey of 30 economists.

A sub-index of business expectations increased for the first time since February and employment shrank at a slower pace than in July, the report said.

``Output in the services sector is contracting only modestly now,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. At the same time, ``we would be surprised to see this recovery continue, particularly given that it has been the banking and real estate sectors that have been badly hit.''

Most recent figures have suggested the outlook for the U.K. is worsening. The Organization for Economic Cooperation and Development yesterday cut its forecast for U.K. growth and said the country may fall into a recession. The number of workers placed in permanent jobs fell the most since November 2001 last month, a separate report today by the Recruitment and Employment Confederation and KPMG showed today.

Prime Minister Gordon Brown's government today suspended a tax on some home purchases to reverse the worst housing slump since the early 1990s and pledged to accelerate 1 billion pounds ($1.8 billion) of spending yesterday.

The Bank of England has little scope to cut its benchmark interest rate after inflation accelerated to 4.4 percent in July, more than double its 2 percent target. All 61 economists surveyed by Bloomberg News expect the central bank to keep its main rate at 5 percent.

U.K. shops raised prices 3.8 percent last month from a year earlier, the most since comparable records began in 2006, the British Retail Consortium reported today.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.netBrian Swint in London at bswint@bloomberg.net.