UK service sector in boost

City A.M. Reporter
Britain's dominant services sector saw surprisingly strong business growth in March and struck an optimistic tone about the months ahead, providing a further sign that economic recovery is taking hold.

Combined with unexpectedly solid growth in manufacturing and construction last month, the expansion in the services sector takes further pressure off the Bank of England to boost t he economy with another cash injection.

The Markit/CIPS Purchasing Managers' Index (PMI) for the services sector rose to 55.3 in March, its highest level since January and up from 53.8 in February, a survey showed.

The latest reading confounded analysts' forecasts for a dip in the index to 53.4 and moved higher above the 50 mark which signals growth in activity.

"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 compiler Markit.

The rebound in the three business surveys suggested that the economy grew by as much as 0.5 per cent in the first quarter, he said.

The services sector - ranging from banks and telecommunication firms to restaurants and hotels - makes up some three quarters of the economy. It shrank slightly in the final quarter of 2011, but returned to growth in January.

The overall contraction of the economy at the end of last year in the wake of an escalation in the euro zone debt crisis had triggered fears of a renewed recession.

The Bank launched a second round of quantitative easing asset purchases in October, and sanctioned another 50 billion pounds in February.

But most economists do not expect further stimulus once the current round of purchases ends in May, after a string of more upbeat economic news indicated that Britain was back on track for a modest recovery.

Service firms' confidence about the year ahead stayed near February's level which was the highest in a year, the PMI showed.

"What's particularly encouraging is that this revival of business confidence is encouraging firms to take on more staff," Williamson said.

"However, 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 t he financial crisis," he said.

The survey showed that companies' cost pressures eased to the lowest level in more than a year-and-a-half. But margins remained under pressure as firms were only just able to nudge up prices.

A separate release from the British Retail Consortium showed that prices for non-food products fell at their fastest annual pace in nearly two-and-a-half years in March, pointing to easing underlying inflation pressures.

However, food price inflation picked up, highlighting the risk to the Bank's forecast that headline inflation will fall below 2 percent later this year.