September 4, 2012 / 2:39 PM / 8 years ago

Service sector pick up boosts recovery hopes

LONDON (Reuters) - Britain’s services sector business picked up in August as companies clinched more new contracts, an unexpectedly strong purchasing managers’ survey showed, in another sign that the country is crawling out of recession.

Staff work in a London 2012 shop selling official merchandise in Green Park, central London, July 21, 2012. REUTERS/Olivia Harris

The jump in the Purchasing Managers’ Index (PMI) for the services sector to 53.7 from 51.0 in July beat even the most optimistic forecast and supported views that the Bank of England will not step up stimulus for the economy on Thursday.

However, the government remains under pressure to boost the economy and loosen its austerity drive — aimed at erasing a huge budget deficit — after a cabinet reshuffle that spared the increasingly unpopular Chancellor George Osborne.

The improvement in the services sector chimes with the stabilisation shown in the PMI survey of manufacturers, and the composite index — which combines services, manufacturing and construction surveys — rose to 52.2, pointing to modest growth for the economy overall, survey compiler Markit said.

The data had been due for publication on Wednesday but were inadvertently released early by Reuters.

Markit’s chief economist Chris Williamson said there were still big questions about how durable this bounce-back would prove.

“The big question is whether the expansion can be sustained,” said Williamson. “It is concerning that the upturn in activity was not matched by a similar rise in hiring, with employment in the service sector instead growing at the slowest pace since February.”

Sterling rose against the dollar and euro after the data and December gilt futures pared gains by more than 10 ticks.

The economy is widely expected to rebound in the third quarter after a number of one-off factors — such as an extra holiday to mark Queen Elizabeth’s 60 years on the throne, and unusually cool and wet weather — dampened output between April and June.

“(The PMI) reinforces confidence that at least you would expect to take back output lost in the second quarter,” said Ross Walker from RBS. “I’d say the risks are now to the upside to our forecast for 0.5 percent third quarter GDP growth.”

But companies remained cautious about the months ahead as uncertainties about the euro zone debt crisis, the government’s austerity drive and a slowdown in major emerging economies pose significant hurdles for a more meaningful economic recovery.

The index measuring businesses’ expectations rose nearly a point to 66.5 but remained below its long-term average.

“It looks like companies are expecting trading conditions to remain very tough in the coming months, meaning any economic growth after the third quarter rebound is likely to be lacklustre at best unless demand picks up meaningfully in the autumn,” Markit’s Williamson said.

Earlier on Tuesday, the PMI survey among construction firms showed a drop in activity in August as new orders slumped at the fastest pace since the height of the 2008-2009 financial crisis.

The construction sector has been the main drag on the economy over first half of this year and the government has announced a number of measures to support private infrastructure investment and house building.

OLYMPICS

But pressure remains on the government to take bolder steps to boost an economy that has not fully recovered the output lost in the wake of the 2008-2009 financial crisis, and which fell back into recession late last year.

Many businesses had hoped the London Olympics would lift consumers’ spirits and boost business. But the services PMI provides mixed evidence, and retailers — who have already reported a weak August — are not included in the survey.

Some companies reported a positive impact on activity, Markit said. Others said the Olympics had impaired growth either due to travel restrictions in and around London or through business being put on hold during the period of the Games.

The British Retail Consortium said on Tuesday that the Olympics failed to boost retail sales last month because many Britons preferred to watch the games rather than go shopping, giving stores one of their worst months of 2012.

The PMI survey showed that firms’ profitability stayed under pressure as costs rose at the fastest pace in four months while companies were barely able to increase their prices.

Reporting by Sven Egenter; Editing by Ruth Pitchford

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