November 4, 2009 / 9:32 AM / 10 years ago

INSTANT VIEW - Services PMI highest since Aug 2007

LONDON (Reuters) - The service sector showed its strongest activity since the start of the credit crunch in October, helped by growth in new orders to a two-year high, a purchasing managers survey showed on Wednesday.

Following are key details of the CIPS/Markit survey and analysts’ reaction.

OCT SEPT FORECAST

Services PMI 56.9 55.3 55.5

Services PMI new business 55.4 54.0 N/A

KEY POINTS

- Highest services PMI since August 2007

- Highest new business component since September 2007

- Rate of job losses smallest since September 2008

- Business expectations down from September’s 29-month high

- Rate of output price falls lowest since November 2008

- Rate of input price inflation highest since November 2008

ANALYST COMMENT

HETAL MEHTA, ERNST & YOUNG ITEM CLUB

“We started the final quarter with a bang, with both manufacturing and services PMI data showing increases in activity. This reinforces our view that the economy will return to growth in the fourth quarter, though it is worth pointing out that the PMIs have pointed to stronger GDP figures than seen in the official estimates over the past few quarters and so on this basis we remain cautious about the outlook.

“Despite the strong data, we do not think this will be enough to dissuade the Bank of England that more action on the monetary policy front is required, and still expect an increase in the quantitative easing programme to be announced.”

HOWARD ARCHER, IHS GLOBAL INSIGHT

“Despite the improved services sector purchasing managers PMI for October, the MPC still seems likely to extend the Bank of England’s Quantitative Easing programme on Thursday as well as keeping interest rates down at 0.50 percent. However, the improved purchasing managers’ surveys probably increase the likelihood of a 25 billion pound rise in QE to 200 billion pounds rather than a 50 billion pound rise to 225 billion pounds.”

JAMES KNIGHTLEY, ING

“The UK service sector PMI, like its manufacturing equivalent released on Monday, has bounced more than expected to its highest level since August 2007.

“New orders also improved, suggesting that economic growth is gaining momentum. Moreover, these indicators are in line with GDP growth in excess of 3 percent year-on-year based on historical relationships, which adds to the confusion over the weakness in Q3 GDP. Admittedly other surveys are not pointing to as strong activity as the services PMI, but they are at least pointing towards expansion.

“Today’s figure may make those opposing further QE harden their attitudes, but with numerous headwinds still facing the consumer (tax rises, lack of credit, rising unemployment, deleveraging etc) and the inflation backdrop remaining benign we still believe that there will be a small majority at the BoE voting to pump in an extra 50 billion pounds into the economy tomorrow.”

VICKY REDWOOD, CAPITAL ECONOMICS

“October’s UK CIPS/Markit report on services echoes the upbeat tone of Monday’s manufacturing survey.

“Of course, the 0.2 percent drop in services output in Q3 was rather weaker than the survey had suggested. Bu this seems to reflect the fact that the official data has begun to lag the survey by around 3 months. Services output should therefore still rise this quarter. And with the manufacturing PMI rising sharply in October, the economy should now have pulled out of recession.

“But a quick return to rapid rates of growth still looks unlikely and we still think that the MPC will err on the side of caution and extend QE further tomorrow.”

ROSS WALKER, ROYAL BANK OF SCOTLAND

“It’s very strong. We are somewhere above long-run averages. Historically these survey levels have been associated with output growth in the service sector of 3.5-4 percent, so above trend rate.

“But there are a number of caveats — survey data only goes back to the mid 1990s and has not been tested in a recession.

“I don’t take these figures literally. I don’t think the survey is growth so fast but there is some traction being gained here. I think we are seeing a large number of companies reporting some sort of recovery. It’s becoming more broad based rather than firms seeing big above-trend increases.

“It may be that the PMI numbers this week persuade the BoE that the recovery is becoming a bit firmer, but for an exit strategy they need to prepare the ground a bit more. A policy shock would just cause confusion.

“The market is looking for at least 25 (billion pounds more of QE), and if they don’t deliver at least 25 they risk an adverse market reaction.”

BRIAN HILLIARD, SOCIETE GENERALE

“It’s a storming set of numbers. If you take the services survey with the pick-up in manufacturing earlier in the week it does cement the view that we will get a recovery in the fourth quarter.

“Clearly it does change the balance of risks for the Bank of England decision. It’s going to be a very close call.”

AMIT KARA, UBS

“Another strong PMI print. It contrasts even more with the official ONS data. What’s more, the PMI survey seems to suggest that the UK is actually outperforming the euro area.

“Given that the MPC remains in the give-growth-a-chance mode and given that it views the risks for policy-making to be asymmetric, we believe that they will extend QE by another 25 billion pounds tomorrow and remain fairly cautious going ahead.”

PHILIP SHAW, INVESTEC

“The survey has taken another leap. Although we don’t have official data yet for activity in October, it will no doubt widen the discrepancy between the ONS figures and what the survey evidence is saying.

“We maintain the MPC will use the anecdotal evidence as a cross-check to the official numbers and on that basis we continue to believe the MPC will pause tomorrow and not supply and further QE.”

PAUL SMITH, MARKIT ECONOMICS

“Growth of the UK service sector gathered momentum in October, accelerating to the fastest in over two years with the headline index, which covers around 40 percent of the UK economy, currently consistent with quarterly growth in excess of 1 percent at the start of Q4.

“Higher levels of incoming new work supported the latest expansion as clients showed confidence in the outlook and released previously postponed expenditure.

“Although services employment continues to fall at a historically marked pace, latest developments in output and demand auger well, with growth in October again supporting the view of a stabilisation of payroll numbers in early 2010.

“However, looking further ahead, a real improvement in jobless numbers to anything resembling close to pre-crisis levels will require growth to be sustained around the present rate for some considerable time.”

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