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

Service sector hits 2-year high

LONDON (Reuters) - The service sector had its best month since the start of the credit crunch in October, a purchasing managers survey showed on Wednesday, but economists were wary about how much would translate into official growth numbers.

The headline PMI index from the Chartered Institute of Purchasing and Supply/Markit survey rose to 56.9 from 55.3, its highest since August 2007 and the sixth successive month above the 50-level that separates growth from contraction.

The improvement beat expectations of a rise to 55.5, and sterling rose to a day’s high against the dollar and a one-week high against the euro in response.

But while many economists treat the data as the best monthly proxy for UK services growth, recent strong performance has not matched the outturn of recent official data.

The GDP unexpectedly shrank 0.4 percent in the third quarter after a fall in services output that surprised economists given the PMI survey had reported activity growth throughout the period.

“We are putting less weight than usual on the PMIs, as recently they have diverged from official ONS data. And, contrary to what some commentators think, the PMIs do not actually directly measure growth in activity,” said Colin Ellis, economist at Daiwa Securities.

TRICKY

While the survey level was the same as previous periods when there was services output growth of 3.5-4 percent, now it probably reflected a broadening in the number of firms seeing growth rather than a big increase in the pace, said Ross Walker, economist at Royal Bank of Scotland.

Interpreting the data will also be a tricky issue for the Bank of England, which must decide on Thursday whether to expand its 175 billion pound quantitative easing programme and continue gilt purchases.

New business rose for a fourth month in a row in October, and at the fastest pace since September 2007, the PMI survey reported.

“Growth of new orders in October was linked to generally higher market demand. Previously delayed expenditure was now being released by clients, in line with growing market confidence,” the report said, adding that financial services had done particularly well.

Nonetheless firms continued to shed jobs, albeit at the slowest pace since September 2008. The trend seems set to continue, with banks HSBC and RBS among the latest companies to announce thousands of job cuts in recent days.

Businesses said that price discounting had played a smaller role in supporting sales than in previous months, and some firms said that higher input costs had caused them to raise prices.

Input price inflation was the strongest in 11 months, albeit still low by historic standards, with companies citing upward pressure from fuel and energy bills, a rise in the minimum wage and pricier imports due to weaker sterling.

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