Service sector growth at four month high

Activity in the country's dominant services sector grew at its fastest pace in four months in July on strong growth in new business, raising hopes that the economy may pick up despite recent dire news from manufacturers and retailers.

However, the services firms also cut jobs, and banks and consumer-facing sectors suffered a drop in output.

The Markit/CIPS services PMI headline activity index rose to 55.4 in July from 53.9 in June, confounding forecasts for a slowdown to 53.2.

Markit said that taken together with the manufacturing PMI survey earlier this week, the data indicated the economy grew by 0.5 per cent in the three months to July - a marked improvement on the lacklustre 0.2 per cent growth recorded from April to June.

Still, the figures are unlikely to alter expectations that the Bank of England will leave interest rates at 0.5 per cent for some time as policymakers wait for the recovery to gain traction, although it may dent hopes for more quantitative easing.

Meanwhile, a drop in the prices charged index to a 10-month low of 50.3 should also reassure rate-setters that inflationary pressures are easing.

Britain's services sector performed more strongly than that of any of its large European peers last month, many of which reported slower or falling activity. But Markit said it remained to be seen whether July's improvement would be repeated in the coming months.

"Given the headwinds of austerity at home and the ongoing public debt issues in major export markets, the scenario of a continued choppy recovery would, at the present time, be the best forecast for the sector's performance in the coming months," said Paul Smith, senior economist at Markit.

A breakdown of the survey showed that while firms enjoyed the strongest growth in new business in three months, they also cut jobs as backlogs of work continued to fall.

Moreover, the rise in the headline index masked falls in activity among hotels, restaurants and personal services companies which rely on consumer demand, highlighting the risk to the recovery from hard-pressed Britons cutting back on spending.

Indeed, the PMI survey does not cover the retail sector, which accounts for about 5 percent of economic output but has made hardly any contribution to growth in the last year.

More worryingly, activity in the financial sector, which accounts for almost a fifth of the PMI survey and some 10 percent of Britain's economy - contracted in July for the third month running and was the weakest performer of all the sub-sectors, Markit said.

The findings come in the week that British banks announced plans to shed thousands of job in the UK. Markit said panellists in the financial sector blamed the drop in business on worries about the economy.

Moreover, companies raised prices at their slowest pace since last September to lure in business, even though their own costs continued to rise, Markit said, highlighting strong competitive pressures in the sector.

And it noted that although firms were slightly more optimistic about business in the coming year, partly in anticipation of the 2012 Olympic games in London, the business confidence index was subdued by historic standards.