Services growth suggests Britain might just skirt recession

LONDON Thu Mar 28, 2013 12:57pm GMT

The Canary Wharf financial district is seen in east London February 28, 2013. REUTERS/Stefan Wermuth

The Canary Wharf financial district is seen in east London February 28, 2013.

Credit: Reuters/Stefan Wermuth

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LONDON (Reuters) - Britain's dominant services industry grew at its strongest pace in five months in January, a small boost to chances the country might narrowly skirt a new recession.

Output in the sector, which accounts for more than three quarters of the economy, rose 0.3 percent in January from December, the Office for National Statistics said on Thursday.

That was its best performance since August although the data can often prove volatile.

Separate surveys showing that house prices posted their first annual rise in more than a year and consumer confidence held steady, albeit a low levels, added to a picture of a slow and delicate recovery.

Jens Larsen, chief European economist at RBC Capital Markets, said the services data suggested zero growth in the economy in the first quarter.

That would mean Britain escapes a recession - as defined by two consecutive quarters of contraction - by the narrowest possible margin.

Other economists thought Britain's economy shrank in the January-March period, an embarrassment for the government which is sticking to its fiscal austerity push.

"Today's data wasn't a disaster, but is it good enough?" said Alan Clarke, economist at Scotiabank. "It's a close call but my feeling is a triple-dip recession is more likely than not."

Weak as it is, Britain's economy is not as fragile as some in Europe, according to forecasts from the Organisation for Economic Co-operation and Development released on Thursday. They showed Britain was set to outperform France and Italy, but not Germany, in the first two quarters of 2013.

SERVICES FIRM, FACTORIES STRUGGLE

Thursday's services data feeds into the ONS's calculation of gross domestic product. A first reading of GDP in the January-March period is due to be released on April 25.

On a year-on-year basis, services output was up 0.8 percent, the ONS said.

A separate Purchasing Managers' Index survey of Britain's services industry released earlier this month also showed the sector holding up.

Its performance contrasts with a weaker picture in manufacturing. Official data showed earlier that manufacturing output fell in January at the fastest pace since June.

Helping services in January was activity in the transport, storage and communications sector as well as in business services and finance. Cold weather and snowfall in the month held back trade at some smaller retailers and at pubs and bars.

Another long spell of cold weather in March could prove the factor that pushes Britain's economy into a new recession.

In the three months to the end of January, services output was down 0.2 percent compared with the three months to the end of October when the London Olympics boosted the economy.

Separately, the ONS reported that productivity across all sectors of the economy, as measured by output per hour, fell 0.5 percent in the fourth quarter compared with the third quarter.

That was the sixth successive decline in British productivity by that measure. Britain has seen rising employment but falling output per worker, which many economists say could reflect companies' desire to keep employees on their books while offering them lower wage growth, rather than firing them.

But some say the productivity numbers might be a sign of something more worrying.

"There is a growing focus on 'zombie' companies that are essentially being kept alive by low interest rates and banks' reluctance to write off loans," said Howard Archer at IHS Global Insight, adding that would prevent new firms from succeeding.

Unit wage costs rose 0.5 percent in the October-December period compared with the previous three months.

(Editing by Jeremy Gaunt.)

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