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Spain service sector shrinks at fastest rate in year -PMI

Source: Reuters - Wed 5th Jan 2011

Activity in Spain's key services sector shrank at its fastest pace in a year in December while new business remained scarce, a poll showed on Wednesday, raising the risk the economy could yet fall back into recession.

Markit's purchasing managers' index (PMI) of services companies fell to 46.2 in December from 48.3 in November, below the 50 mark which divides growth from contraction for the fifth straight month and at its lowest since December 2009.

"The Spanish service sector ended 2010 in a similar position to that in which it started the year, with activity, new orders and employment all falling," Markit economist Andrew Harker said.

"The hoped for recovery (last) year has failed to materialize despite some tentative improvements during the summer."

The average reading for activity over 2010 was 49.3, just shy of the no-change 50 mark.

Anecdotal evidence suggested reduced activity in the services sector, which represents more than 60 % of gross domestic product, was a reflection of weakness in the wider economy, Markit said.

Spain became the focus of attention for international investors in December on concerns it might be forced to follow Greece and Ireland in having to seek European aid, pushing up bond yields and forcing the government to announce further austerity measures.

Those measures risk further derailing the economy, which has struggled to rebound since exiting an 18-month long recession early last year and which stagnated between the second and third quarters.

Some economists say Spain is at risk of falling back into recession but are cautious as the government insists fourth-quarter gross domestic product will be positive.

New business also contracted for the fifth straight month in December, with the PMI's new business sub-index falling to 44.8 points, from 47.2 points in November.

Meanwhile, companies responded to worsening business conditions by reducing staff levels, with layoffs reported for the 34th straight month, and the hotel and restaurant sectors worst hit. "A number of companies seem resigned to persistently low workloads, and are adjusting their staffing levels accordingly," said Harker.

There was some good news in that business sentiment rose to its highest level since August, with companies surveyed saying they expected output levels to rise over the next year. A Spanish manufacturing PMI, released on Monday, also rose slightly in December on the back of better export orders.

Services companies, however, continued to face cost pressure as rising competition and pressure from clients forced them to cut the prices they charged for the 29th straight month while their input costs rose on the back of higher energy prices.

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