January 6, 2010 / 9:34 AM / 10 years ago

Services PMI signals Q4 GDP growth

LONDON (Reuters) - Service sector activity accelerated slightly in December after the strongest growth in new orders since September 2007, boosting economists’ belief that the economy exited recession in the last quarter of 2009.

A maid works in a bedroom of a hotel in London, April 17, 2006. REUTERS/Catherine Benson

The modest improvement in the services PMI index from the Chartered Institute of Purchasing and Supply and Markit follows a strong gain in the equivalent manufacturing survey, and an improvement in the Recruitment and Employment Confederation’s job placement measure overnight.

CIPS/Markit said the business activity index rose to 56.8 from November’s 56.6, slightly above economists’ forecasts and just below October’s 27-month high of 56.9.

Large firms’ activity increased much faster than that of smaller businesses in December, with the business services sector growing fastest.

Any number above 50 indicates that a majority of firms surveyed reported expansion that month, and Markit said the data suggested that the service sector expanded by 1 percent in the last three months of 2009.

“December’s report on services provides further evidence that the economy moved decisively out of recession in the fourth quarter,” said Vicky Redwood, economist at Capital Economics.

“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.”

Britain has been suffering its deepest recession since quarterly records began in the 1950s, and after a surprise contraction in the third quarter remained in decline after most other big economies returned to growth.

BRIGHTENING OUTLOOK

Economists said that the survey suggested there would be sustained recovery in 2010, though an end to temporary government support measures such as a cut in value-added tax and subsidies to buy new cars would limit growth.

The services PMI new business index rose to 57.0 from 56.8, and while business expectations slipped, they remained close to the two-and-a-half year high set in September.

“New orders suggest that what we’re seeing is not a flash in activity data but a trend improvement,” said David Page, an economist at Investec.

Nonetheless, some economists have been wary about the series’ reliability in predicting services growth since official data showed a surprise 0.2 percent third-quarter contraction, despite the PMI data previously showing growth for the period.

“The divergence of survey results from the official data still gives us reason to remain cautious,” said Hetal Mehta, economic advisor to the Ernst & Young ITEM Club.

“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,” she added.

Consumer confidence suffered its biggest fall for over a year last month as the public started to focus on the fiscal tightening needed to rein in the budget deficit, a survey from Nationwide Building Society showed earlier on Wednesday.

CIPS/Markit said employment contracted for a record 20th consecutive month, albeit by the smallest margin since August 2008. And firms’ profit margins were under pressure from rising input costs, primarily fuel, while they themselves cut prices under competitive pressure.

Sterling’s slide against the euro and dollar in late 2008 and early 2009 has made inflation stickier than that of most other large economies, and the British Retail Consortium said on Wednesday that shop price inflation rose to a 13-month high in December.

Editing by Andy Bruce and Toby Chopra

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