LONDON Britain's services sector grew more strongly than expected in February and at its fastest pace in five months, suggesting the economy may narrowly avoid a triple-dip recession, a survey showed on Tuesday.
The Markit/CIPS Purchasing Managers' Index for services rose to 51.8 last month from 51.5 in January, beating the median forecast of 51.0 in a Reuters poll of economists.
The figures bucked a downbeat message from an unexpected fall in factory activity last week and the weakest construction PMI in over three years, which had revived fears that Britain's economy was heading for a third recession in four years after it shrank in the last quarter of 2012.
Sterling rallied against the dollar and government bond futures fell sharply on the news, as investors' doubts grew over whether the Bank of England will restart its asset purchase programme later this week, a form of quantitative easing meant to boost the economy.
"The market was poised for a weaker number, following the manufacturing and construction figures, and everyone was going to leap on this 'more QE on Thursday' band wagon ... (but) I'm struggling to see what the pressing need for more QE is," said Ross Walker, economist at Royal Bank of Scotland.
Services make up more than three quarters of the British economy, and although Tuesday's figures do not cover retailers or the public sector, Markit said that when combined with manufacturing and construction figures, they pointed to economic growth of 0.1 percent in the first three months of 2013.
"Growth could turn out stronger than this, as there's good reason to believe that at least some of the weakness in manufacturing and construction was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March," Markit economist Chris Williamson said.
In further upbeat news, overnight the British Retail Consortium reported the strongest sales growth in almost two years in February, partly bolstered by signs that a greater number of house purchases is driving demand for furniture, homewares and expensive electrical goods.
Markit said confidence among services firms continued to improve, with optimism about future business activity hitting a nine-month high of 67.6, a fraction up on January's 67.2.
But rising input costs squeezed operating margins, as competitive pressures continued to restrain pricing power.
The rate of inflation for input costs accelerated from January and was the sharpest in 14 months.
The survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants.
The Bank of England's top policymakers meet on Wednesday and Thursday to decide whether to help the economy further, having already spent 375 billion pounds on government bonds.
A Reuters poll of economists conducted from February 26 to 28 showed a 40 percent chance of the bank opting for more QE this week and a 60 percent chance before the year is out.
Since the poll was taken, the unexpected contraction of manufacturing in January and other signs of weakness in the economy have made the March 7 decision an even closer call, economists have said.
(Additional reporting by David Milliken; Editing by Ruth Pitchford)