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Strong UK services sector survey boosts recovery hopes Strong UK services sector survey boosts recovery hopes
(about 4 hours later)
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. A spring revival for UK businesses has bolstered hopes the economy is picking up pace and managing to overcome the headwinds that have been battering firms in the eurozone.
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 latest in a clutch of business surveys to beat expectations on Wednesday indicated that the UK's dominant services sector, which spans hairdressers to banks to transport, enjoyed a jump in activity in March. The resurgence came as new business growth improved and prompted companies to take on staff, 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. The survey followed similar reports from the smaller construction and manufacturing sectors this week that have helped bolster the view Britain will avoid recession.
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. Those contrasted with reports of falling business activity across the eurozone, where businesses are suffering from lacklustre demand on the back of the ongoing sovereign debt crisis and the threat of recession spreading across the currency area.
"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. In the UK, the upbeat indicators prompted forecasters to suggest economic growth may have rebounded strongly to as much as 0.5% in the first quarter, undoing the 0.3% drop in GDP at the end of last year.
"The surveys … also suggest that the Bank of England will hold off on further asset purchases unless the economic situation deteriorates in coming months." "Faster growth of services activity in March indicates that the economy is on the up again, skirting recession as business continues to bounce back from the lull seen late last year," said Chris Williamson, chief economist at survey compilers Markit.
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%. The main headline activity reading on the closely watched 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.
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. Economists said the latest crop of stronger-than-expected data in the UK suggested the Bank of England would hold off making any changes to policy when it makes its latest announcement on Thursday.
"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. Risks remain in coming months from high oil prices, the government's austerity drive and the ongoing eurozone debt crisis, economists said. Bank governor Mervyn King has also warned the extra UK bank holiday for the Queen's jubilee in June could hurt economic output in the second quarter.
"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." The services report showed business confidence remained fragile.
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. "This is no runaway recovery. Although on the rise, job creation and inflows of new business continue to run well below rates generally seen in the years before the financial crisis," said Williamson.
The services report showed confidence remained fragile among many businesses and growth of new work remained below trend. The recent recovery in UK activity contrasted with continued weakness in the eurozone. Services businesses there suffered their second month of falling activity, according to Markit's PMI data. That followed a drop in activity among manufacturers reported earlier this week. After the single currency union's economy shrank at the end of last year, economists warn it will have failed to bounce back in the first quarter of 2012.
"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. "It is highly likely that the eurozone suffered further modest contraction in the first quarter of 2012 which will put it back into recession," said Howard Archer, economist at IHS Global Insight.
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 region is still facing major headwinds, notably including increased fiscal tightening in many countries, markedly rising unemployment overall, and increased oil prices. And while eurozone sovereign debt tensions have been eased by the European Central Bank's actions and a second bailout for Greece, the problems are far from resolved."
In the US the picture from this week's crop of business surveys was more mixed. The manufacturing sector managed to outstrip expectations but service sector growth slowed more than expected from February's one-year high, according to the Institute for Supply Management.
Emerging markets also continue to enjoy the kind of growth that has been eluding much of the eurozone, with the latest round of PMI surveys from China, India and Brazil all showing ongoing expansion in March.