February 5, 2013 / 10:52 AM / 7 years ago

Surprise growth in UK services cuts chance of recession

LONDON (Reuters) - Britain’s dominant service sector unexpectedly returned to growth in January and optimism among firms jumped, reducing the chances of a triple-dip recession.

People walk past Tower Bridge during rush hour in the financial district of the City of London January 29, 2013. REUTERS/Luke Macgregor

The Markit/CIPS Purchasing Managers’ Index for services, published on Tuesday, rose to 51.5 from 48.9 in December when the sector shrank for the first time in two years.

January’s reading was the strongest since September and beat the median forecast of 49.5 in a Reuters poll of economists. However, the survey highlighted growing inflation pressures.

“It does suggest the UK economy has started growing again in January, which is certainly good news for all those fearing a triple-dip recession,” said Investec economist Victoria Clarke.

The report also added to expectations that the Bank of England will opt against extending its asset purchases, intended to stimulate the economy, when it concludes its policy meeting on Thursday.

The pound rose against the dollar and the euro.

After only one quarter of expansion, Britain’s economy contracted again at the end of last year, raising the prospect of its third recession in four years and underscoring the challenge facing the Bank of England’s next governor, Canadian Mark Carney. He speaks to British lawmakers on Thursday.

The PMI survey chimes with the latest quarterly forecast from the National Institute of Economic and Social Research, a leading think-tank, which said Britain would probably skirt a triple-dip recession. Recession is generally defined as at least two consecutive quarters of contraction.

However, the institute now expects Britain’s economy to grow more slowly this year and next than it thought only three months ago, it said in a quarterly report.

Growth in the service sector, combined with a tick-up in manufacturing and a fall in construction output, points to modest economic growth at the start of 2013 despite disruption from unusually poor weather, said Chris Williamson, economist at survey compiler Markit.

“Stronger growth would inevitably have been recorded had the country not suffered the heavy snowfall, suggesting the underlying trend is even stronger than these numbers indicate,” he added.

The service sector accounts for more than three quarters of Britain’s gross domestic product, including public services which are not covered by the survey.

In a potentially worrying sign for British policymakers, prices charged by UK service firms rose at their fastest pace since June 2011 although much more slowly than the increase in their costs.


However, retail sales rose strongly in January, boosted by the popularity of tablet computers and smartphones while shoppers were also attracted to special offers, according to a poll by the British Retail Consortium.

Stronger demand drove the rise in overall services activity - including income and chargeable hours worked - as well as in new business compared to December, Markit said.

Firms beefed up their staffing levels - with the employment index reaching its highest since July - to cope with new business or as part of investment plans.

An index measuring business expectations climbed to its highest since May, despite some worries over intensifying spending cuts by the government.

Companies may also take heart from brighter prospects in Britain’s main export market, the euro zone. Its economy has turned a corner, according to Markit’s Eurozone Composite PMI survey, which showed businesses more optimistic about the future.

The services survey covers transport, storage and communication, financial, business and personal services, computing and IT and hotels and restaurants, but excludes retail.

Additional reporting by Li-mei Hoang; Editing by Ruth Pitchford

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