Surprise after services grow

THERE was a rare piece of good news for George Osborne yesterday, after a survey showed the all-important services sector growing at its fastest pace in four months in July.

The Markit / CIPS services purchasing managers’ index rose to 55.4 last month, ahead of June’s reading of 53.9 and confounding expectations for a slowdown to 53.2. The figure is comfortably above the 50 watermark that separates contraction from expansion.

Markit, which described the figures as “surprisingly strong”, said the data suggested the economy was growing at a rate of around 0.5 per cent a quarter last month, better than the sluggish 0.2 per cent growth recorded in second quarter.

Although the government has talked up manufacturing as the sector that will buoy the recovery, a strong services sector – which accounts for about three-quarters of GDP – is much more important for growth.

Stripping out the drag from industry, which was highlighted in a separate manufacturing PMI earlier in the week, the economy is growing at a relatively robust 0.7 to 0.8 per cent, Markit said.

But the picture wasn’t all rosy for Osborne. Robert Chote, head of the independent Office of Budgetary Responsibility, warned in an interview the UK will need to downgrade its 1.7 per cent growth forecast for this year.

And Markit also warned that austerity measures and the sovereign debt crisis in the Eurozone – a crucial export market – would mean that the recovery would continue to be choppy.

Sterling rallied briefly on the data, hitting a two-month high against the euro, as some traders bet stronger growth could force the Bank of England to hike rates. However, George Buckley, a Deutsche Bank economist, said the services PMI needs to rise by a further three points before the Bank considered tightening.

There was worse news for the services sector in the Eurozone, which grew at its weakest rate in nearly two years.

The Markit Eurozone PMI tumbled to 51.6 last month from 53.7 in June, its lowest level since it hit 51.34 in September 2009. Worst of all, there were signs of softness even in France and Germany, not just troubled peripheral nations like Spain and Italy.

Howard Archer, economist at IHS Global Insight, said the weak services data would mean the ECB will not hike rates today.