Recovery optimism grows, helped by services sector

LONDON Fri May 3, 2013 1:22pm BST

A doorman closes a taxi door outside a hotel in central London September 5, 2011. REUTERS/Toby Melville

A doorman closes a taxi door outside a hotel in central London September 5, 2011.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - Britain's economy may be finally gaining some ground, with stronger-than-expected growth in the dominant services sector capping a week of relatively upbeat economic news.

The services sector - which accounts for around three-quarters of Britain's economy - grew at its fastest pace in April since last summer's Olympics, boosted by the strongest increase in new orders in almost a year.

Along with recent forecast-beating gross domestic product data and manufacturing and construction surveys, Friday's services reading will ease pressure on the government to water down its austerity programme, even after a poor showing in local elections this week.

It also reinforces expectations the Bank will refrain from further stimulus next week, and possibly longer.

A Reuters poll this week showed almost half of economists now believe there will be no further government bond-buying this year.

Sterling rose against the dollar on Friday as the rise in the service sector survey further diminished expectations that the Bank might pump more money into the economy any time soon.

"Today's release marks a hat-trick of upside surprises for April," said Simon Hayes, UK economist at Barclays. "Recent activity indicators have had a more encouraging tone and add to the case for the Monetary Policy Committee holding policy when it meets next week."

The Conservative-led government coalition austerity programme has been under fire for stifling growth and the latest data may relieve political pressures reflected in poor poll showings.

The anti-European Union UK Independence Party made big gains in local elections on Thursday against the conservatives.

The Markit/CIPS services Purchasing Managers' Index rose to 52.9 in April, its highest reading since August and the fourth consecutive monthly rise. Economists in a Reuters poll had expected the index to stay at March's level of 52.4.

The improvement was broad-based, supported by the strongest rise in new orders since last May.

Markit's combined index of services, manufacturing and construction in Britain rose more than a full point to 52.1 in April, also the highest since last August.

The figures will be welcomed by the government which, until last week's GDP data, feared the country might be slipping into its third recession in five years. In the event, the data showed Britain's economy grew 0.3 percent in the first three months of this year.

Markit economist Chris Williamson said April's purchasing managers' surveys suggested the return to growth seen in the first quarter may have gained momentum at the start of the second.

That prospect should help the government avoid criticism from the International Monetary Fund draws up its annual health check of Britain's economy later this month.

(Writing by Christina Fincher; editing by William Schomberg, Hugh Lawson, Ron Askew)

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