Robust UK data dims case for more monetary stimulus

LONDON Wed Jul 3, 2013 3:55pm BST

Mark Carney, the governor of the Bank of England, attends a monetary policy committee (MPC) briefing on his first day at the central bank's headquarters in London July 1, 2013. REUTERS/Jason Alden/pool

Mark Carney, the governor of the Bank of England, attends a monetary policy committee (MPC) briefing on his first day at the central bank's headquarters in London July 1, 2013.

Credit: Reuters/Jason Alden/pool

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LONDON (Reuters) - Britain's service sector grew at its fastest pace in over two year in June, boosting hopes for a sustained recovery and dimming speculation new Bank of England Governor Mark Carney will usher in a new wave of stimulus.

Separate surveys showing subdued inflation and rising demand for credit added to the stream of upbeat economic news that has dominated Carney's first week on the job.

Britain's closely-watched Purchasing Managers' Index for services leapt two points to 56.9, higher than any economist polled by Reuters had forecast. Anything over 50 indicates growth.

Sterling jumped as investors bet the Bank of England's Monetary Policy Committee - which will conclude its first meeting under Carney on Thursday - would be in no rush to restart the printing presses.

A minority on the Monetary Policy Committee has consistently argued for more quantitative easing in recent months and Carney, who gained a reputation for monetary activism when at the helm of the Bank of Canada, had been widely expected to back that view.

The details of Wednesday's services survey were unequivocally strong: New orders and employment both rose at their fastest pace in six years, while business optimism also enjoyed a significant rise.

"I'm surprised by how strong it is," said Brian Hilliard, UK economist at Societe Generale. "It looks rather difficult for Carney to come in with all guns blazing for more easing."

FROM LAGGARD TO LEADER

Markit said its composite activity index, which includes services, manufacturing and construction, pointed to economic growth of at least 0.5 percent in the second quarter - a rate that would make Britain one of the fastest-growing industrialised economies.

Such a pace would be a fillip for the government which came under heavy criticism earlier this year for sticking to a tough austerity agenda.

"With growth this strong it's hard to see how any of the members of the Monetary Policy Committee could make a case for further quantitative easing," said Chris Williamson, Markit's chief economist.

George Buckley at Deutsche Bank noted that the composite index was close to the level at which the central bank has in the past tightened policy, at 56.5 compared with an average tightening level of 57.4.

Andrew Sentance, a former Monetary Policy Committee member known for his hawkish views, said he expected an exit strategy from Britain's record low interest rates and its bond-buying would come onto Carney's agenda over the next 12 months, if economic data continued to be positive.

"Planning for the monetary exit will be the big challenge of Carney's governorship," Sentance said.

"Remember that Carney raised rates in Canada in 2010 from 0.25 percent to 1 percent. He is one of few Western bank governors to have actually raised rates since the crisis," he told the online Reuters Global Markets Forum.

HEADWINDS REMAIN

Separate figures on Wednesday added to the rosier outlook.

However, there remain headwinds to recovery, not least from deep cuts in public spending.

A report from the Organisation for Economic Co-operation and Development this week said Britain faced the deepest budget cuts in Europe over the next decade to put finances back on track.

Britain's Finance Minister George Osborne unveiled last month 11.5 billion pounds ($17.5 billion) in cuts for the 2015/16 fiscal year, including steps to trim the welfare budget, but the OECD's findings suggest that will not be enough.

Britain's deficit is expected to be 6.8 percent of economic output in 2013, according to the European Commission, only lower than that of Ireland in the bloc, and more than double the level of Italy. Germany's deficit is seen at 0.2 percent this year.

(Additional reporting by William Schomberg, Anders Melin and Kirsten Donovan; Editing by Hugh Lawson/Jeremy Gaunt)

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Comments (1)
Cynicalsam wrote:
With so much good news from UK companies, why is the stock market slumping to it’s worst performance for months against recovering trends from recession? Why is the UK economy being talked down? Investers must take note of the naysayers and act appropriately. Must be a bad smell from LSE affecting the traders ‘shorting’ in their pants..

Jul 03, 2013 8:03pm BST  --  Report as abuse
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