Wednesday, April 4, 2012

Strong UK services sector survey boosts recovery hopes

The-services-sector-spans-008 Hopes that Britain's economic recovery is picking up pace have been fanned by a stronger than expected survey from the services sector, the third report in as many days to beat forecasts.

The dominant services sector, which spans hairdressers to banks to transport, enjoyed a pickup in activity in March as well as faster growth in new business and hiring, according to the latest Markit/Cips UK Services PMI.

The survey follows similar reports from the smaller construction and manufacturing sectors this week that have helped bolster a view Britain will avoid recession. The headline activity reading on the services report rose to 55.3 from 53.8 in February. That was well above the 50-mark dividing contraction from expansion and higher than economists' forecasts for 53.4.

After the economy shrank at the end of last year it now appears that it clocked up at least some growth at the start of 2012. Survey compilers Markit said its indications from businesses suggested growth was as strong as 0.5% in the first quarter.

"That more than offsets the 0.3% decline seen in the final quarter of 2011 and indicates the UK has avoided a return to recession," said Markit's chief economist Chris Williamson.

"The surveys … also suggest that the Bank of England will hold off on further asset purchases unless the economic situation deteriorates in coming months."

The Bank's monetary policy committee (MPC) is meeting on Wednesday and Thursday to make its latest decisions on interest rates and its programme of creating money to buy assets, known as quantitative easing (QE). With signs that a tepid recovery has picked up pace in recent weeks the Bank is expected to make no change to its £325bn QE programme and to leave interest rates at their record low of 0.5%.

Economists also doubt the Bank will make any changes at next month's meeting when it will have its latest quarterly forecasts for inflation and the economy.

"This has been a cracking week for UK data, with all three PMI indicators registering positive surprises and the British Chambers of Commerce survey also looking good. How that translates exactly into first quarter GDP is more of an open question, but it would very surprising indeed if there was a fall in output," said David Tinsley, UK economist at BNP Paribas.

"The most important point is that there appears to be some solid momentum behind the economy going into the second quarter. For sure some of that will probably fade, but it is doubtful the economy is going to look weak enough for the MPC to consider more QE in May."

Still, risks remain in coming months from high oil prices, the government's austerity drive and the ongoing eurozone debt crisis, economists say. Bank governor Mervyn King has also warned the extra UK bank holiday for the Queen's jubilee in June could hurt economic output and knock the economy back into negative territory in the second quarter.

The services report showed confidence remained fragile among many businesses and growth of new work remained below trend.

"This is no run-away recovery. Although on the rise, job creation and inflows of new business continue to run well below rates generally seen in the years prior to the financial crisis," said Williamson.

Overall, however, the latest crop of economic indicators are at odds with last week's assertion that the UK is heading back into recession – technically two consecutive quarters of contraction – and will be among the slowest of the world's largest economies to recover in the first half of this year, according the Paris-based thinktank, the Organisation for Economic Co-operation and Development (OECD).

The Guardian

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