January 6, 2010 / 9:56 AM / 11 years ago

INSTANT VIEW - Services PMI edges higher in Dec

LONDON (Reuters) - Service sector activity accelerated slightly in December after the strongest growth in new orders since September 2007, but firms also faced rising costs, a survey of purchasing managers showed on Wednesday.

DEC NOV FORECAST

Headline PMI 56.8 56.6 56.6

New business 57.0 56.8 -

- Highest new business component since Sept 2007

- Highest employment component since Aug 2008

- Highest input cost inflation since Oct 2008

- Smallest fall in prices charged since Oct 2008

- Smallest reduction in outstanding work since Feb 2008

EOIN O’CALLAGHAN, ECONOMIST, BNP PARIBAS

“Like the manufacturing PMI at the start of this week, the UK services sector PMI rebounded in December. It rose 0.2 of a point to 56.8 and so largely unwound November’s dip which always looked like a blip in a rising trend.

“Looking ahead, loose financial and monetary conditions suggest this survey should remain elevated though having risen over 16 points since the trough the scope for further upside is becoming more limited.”

VICKY REDWOOD, ECONOMIST, CAPITAL ECONOMICS

“December’s CIPS/Markit report on services provides further evidence that the economy moved decisively out of recession in the fourth quarter.

“With the manufacturing and construction surveys also rising in December, the quarterly average of the three surveys is on the face of it consistent with a rise in GDP in Q4 of 0.6 percent or so. Even if the surveys prove a bit optimistic, it looks a safe bet that the recession ended at the end of last year.”

“Remember, though, that the recession has probably left a huge amount of slack in the economy. To use this up, economic growth needs to strengthen even further — to above its trend or average rate — which looks unlikely in the face of, amongst other factors, the looming fiscal squeeze.”

HOWARD ARCHER, CHIEF UK ECONOMIST, IHS GLOBAL INSIGHT

“The December purchasing managers survey for the services sector showed encouraging improvement, adding to the recent generally better news on the economy.

“Given the dominant role of the services sector, this reinforces belief that the UK finally exited recession in the fourth quarter of 2009 — although it needs to borne in mind that in recent months the purchasing managers survey has been portraying a significantly healthier picture of the services sector than the hard data.”

“The improvement in services sector activity in December reinforces belief that the Bank of England’s Monetary Policy Committee will sit tight on both interest rates and Quantitative Easing on Thursday.

“Indeed, we suspect that the Bank of England will not extend Quantitative Easing further unless the economy suffers a serious relapse over the coming months. However, any tightening of monetary policy still looks a long way off.”

AMIT KARA, UK ECONOMIST, UBS

“It’s a robust survey outcome. I think the key is that there’s this discrepancy between the survey data and the official data, where the UK appears to outperform on the survey but underperform on the official.

“Our sense is that 2010 will be a good year for economic growth, and the PMI data will turn out to be more accurate. What’s more, the forward-looking indicators in today’s data suggest the positive trend is likely to persist.”

HETAL MEHTA, ECONOMIC ADVISOR TO ERNST & YOUNG ITEM CLUB

“Activity is still increasing at a strong pace, and is a further sign that the recession will have ended in Q4.”

“But the divergence of survey results from the official data, still gives us reason to remain cautious. In any case, the recovery is not expected to be rampant since much of the support to the economy is short term in nature such as the car scrappage scheme and the turning of the stock cycle.”

ROSS WALKER, RBS FINANCIAL MARKETS

“It looks pretty much as expected. The level of this survey still looks unusually high ... so I think you treat that with a little bit of caution but there must be some underlying improvement for the survey still to be capturing these sort of levels.”

“I think it is probably exaggerating the growth rates we’ll see being sustained in the service sector but it is a reasonably encouraging number.”

DAVID OWEN, EUROPEAN ECONOMIST, JEFFERIES

“The UK services PMI is just a touch stronger than expected and provides more evidence the economy is coming out of recession. What remains to be seen, though, is how much of the recovery has been led by an upturn in the inventory cycle.

“Our view is that the BoE will hold rates at 0.5 percent for the whole of this year.”

DAVID PAGE, UK ECONOMIST, INVESTEC

“It’s very close to consensus. It’s a very strong survey reading again, which suggests that the UK service sector is expanding at a relatively robust pace. We’ll be interested to see how it squares with official data, but it suggests that the UK economy should expand at a modest pace in 2010.

“New orders suggest that what we’re seeing is not a flash in activity data but a trend improvement. But as we look to 2010, regardless of the robustness of the services PMI, we will be looking at below trend growth for most of the year.”

PAUL SMITH, SENIOR ECONOMIST, MARKIT ECONOMICS

“December’s data confirmed that the UK service sector recorded robust growth during the final quarter of 2009, remaining consistent with a quarterly expansion on the official measure of above 1 percent.”

“With new business rising at the strongest pace since September 2007 and expectations relatively high, the fundamentals remain in place for further solid gains in activity at least in the near term.”

“On the jobs front, private sector services employment moved closer to stabilisation, with the rate of job shedding the weakest for nearly a year-and-a-half.

“While this continues to support the view of an earlier-than-expected peak in overall joblessness, focus in 2010 is likely to increasingly shift to the public sector where expected austerity will inevitably impact on aggregate jobs and pay.”

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