April 7, 2010 / 10:13 AM / 10 years ago

Economy sends mixed signals

LONDON (Reuters) - The modest economic recovery remains on track, surveys showed on Wednesday, though service sector growth slowed last month and a looming public spending squeeze is making firms reluctant to invest.

Prime Minister Gordon Brown (R) and his wife Sarah pose for photographers during visit to a smoothie company in west London April 7, 2010. REUTERS/Stefan Rousseau/Pool

With the health of the economy a key factor in a May 6 election shaping up as the most closely fought for a generation, the CIPS/Markit purchasing managers’ index showed the country’s services sector expanded less than expected in March.

The reading slipped to 56.5 from February’s three-year high of 58.3.

Separate figures from the Office for National Statistics showed services output fell in the first month of the year at its fastest monthly pace since August.

A survey from the British Chambers of Commerce showed export balances for both services and manufacturing firms improved at the start of this year. However, investment balances worsened and confidence remained low by pre-recession standards.

There was also a marked divergence between the services sector, which continued to strengthen, and the manufacturing sector which stagnated.

“The results support the view that GDP growth stayed positive in the first quarter, but the recovery is set to remain fragile and sluggish,” said David Kern, BCC chief economist.

Another survey, from the Recruitment and Employment Confederation, showed the number of people placed in permanent jobs rose last month at the fastest rate since October 1997.

However the report noted that the return of confidence was confined to the private sector and the public sector was set for a long period of belt-tightening.

“The public sector recession which clearly is on the cards hasn’t hit the jobs market yet but when it does, the upward trend we have seen over the last couple of months may come to a halt,” said Bernard Brown, a partner at KPMG.

FRAGILE RECOVERY

The economy’s emergence from recession in the fourth quarter of last year allowed the Labour Party to regain some popular support.

Polls are now pointing to a “hung parliament” in next month’s election, with the Conservative party having a greater share of the vote but not enough seats in parliament to secure an overall majority.

An inconclusive election result is the worst-case scenario for financial markets, which want the next government to have a clear mandate to tackle a budget deficit forecast to exceed 11 percent of GDP in the 2010/11 fiscal year.

Favourable winds are few at the moment, though interest rates remain at record lows. The Bank of England slashed rates to 0.5 percent in March last year and is not expected to raise them until the fourth quarter of this year at the earliest.

Inflation, which surged well above target at the turn of the year, also looks set to be abating and most economists expect it to retreat below 2 percent by the end of the year.

Slideshow (7 Images)

There was good news on that score from the British Retail Consortium which said shop price inflation slowed to 1.2 percent last month, its weakest pace since November.

“Falling shop price inflation is particularly welcome relief for consumers as they face sharp rises in other living costs, such as fuel,” said Stephen Robertson, director general of the British Retail Consortium.

Additional reporting by Sumeet Desai and David Milliken; editing by John Stonestreet

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