Fresh signs of hope for UK economy

 
Tim Wallace
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THE ECONOMY is showing more signs of getting back on its feet as new figures out today show parts of the services sector expanding at their fastest pace since before the financial crisis.

Consumer spending is at last picking up, according to the study from the Confederation of British Industry (CBI), after a long squeeze and businesses are increasingly optimistic on growth.

And Andrew Sentance, a former member of the Bank of England’s monetary policy committee (MPC), hopes it could soon be time to start raising interest rates as growth picks up.

Consumer services firms like bars, restaurants and hotels saw sales rise sharply in the three months to May, reaching their fastest pace since August 2007, the CBI’s survey shows.

Those with rising sales outnumbered those with falling sales by 10 percentage points in the quarter. Those strong figures pushed up profitability – a net balance of 21 per cent reported an improvement in the quarter, the best result since November 2007.

Businesses now expect that growth to take hold – a balance of 30 per cent of consumer services are optimistic.

Professional services firms are also upbeat, with a balance of 29 per cent now optimistic – the highest level since February 2010 – and a balance of 21 per cent expecting sales to grow in the coming quarter. A balance of 21 per cent expect to hire more staff.

“What’s promising is that consumer services have seen growth in activity, and expect this to continue pointing to a greater willingness from people to go out and spend,” said the CBI’s Stephen Gifford. But he remains wary of announcing an all-out recovery.

“Conditions remain tricky, with consumers grappling with a squeeze on real incomes, and business confidence vulnerable to adverse developments in the global economy,” he warned.

Meanwhile PwC economist Andrew Sentance said a rise in rates in the near future may be necessary as the economy recovers, and could even boost, not slow, the UK’s recovery.

“There is a lot of discussion about problems for borrowers, but the longer these very low interest rates go on the worse things get for savers who are squeezed and adjust their spending down,” he told City A.M. “The arguments are not just one-way.”

And he said it is vital the Bank of England prepares the ground for a rise to make sure households and firms are not caught unawares and left unable to pay for their borrowing when rates do rise.

“If we are going to get rates up from these levels it needs to be a gradual process – the MPC cannot leave it until the conditions are right for higher rates and then suddenly raise them a lot,” he said.