June 3, 2009 / 10:29 AM / 11 years ago

Services data point to recession's end

LONDON (Reuters) - The service sector staged a surprise return to growth in May, raising the prospect that the country’s recession may be about to end, economic data company Markit said in its monthly PMI survey on Wednesday.

A man carries a flag of St George as he walks past the Canary Wharf area of London April 2 2009. REUTERS/Phil Noble

Consumer confidence also hit a six-month high in May, according to a survey by mortgage lender Nationwide, though economists warned that rising unemployment and a shortage of bank lending limited the chances of a strong recovery.

Nonetheless, the data is good news for the Bank of England — which so far has seen little evidence that its 125 billion pound quantitative easing policy is working — and for Prime Minister Gordon Brown, whose Labour Party contests European elections on Thursday in disarray.

The services purchasing managers’ index rose to 51.7 in May from 48.7 in April, its highest level since March 2008 and the first time it has crossed the 50-mark that separates growth from contraction since April 2008, a survey by Markit and the Chartered Institute of Purchasing and Supply showed.

The unexpected increase in the service PMI also propelled the composite PMI, which includes Britain’s harder-hit manufacturing and construction industries, into growth territory for the first time since March 2008, and pushed sterling to a 6-month high versus the euro.

“If sustained, the rise in the PMI surveys into June would indicate an increase in GDP as early as Q2, albeit an extremely modest rise,” said Chris Williamson, Markit’s chief economist.

This would make Britain the first major developed economy to exit the global recession caused by the burst of the U.S. real estate bubble in 2007 and the ensuing financial market turmoil.

Recession also appeared to be easing in the euro zone, where the composite PMI rose to 44.0 in May from April’s 41.1, though it remains firmly in downturn territory, unlike the British composite PMI which rose to 50.4 from 46.8.

“Today’s reading is probably the first genuine bit of good news on activity for many months, as opposed to ‘less bad’ data,” said Colin Ellis of Daiwa Securities.

“And it will bolster hopes that the UK economy as a whole can start growing sooner rather than later — GDP may well still fall in Q2, but a rise in the third quarter is looking more likely by the day,” he added.

Service industries’ business expectations rose to 69.8 from 64.6, taking them to their highest level since October 2007, and the new business indicator also moved into positive territory and its highest level since March 2008.

CHALLENGES TO GROWTH

However, the PMI and other data showed clear challenges to a strong recovery, chief among them the fact that unemployment is likely to keep rising even as the economy pulls out of recession.

Markit said a high degree of spare capacity remained in the services sector, and that sales growth had been partly supported by discounting.

The services PMI employment measure rose only slightly, remaining well below 50, and separate data from the Recruitment and Employment Confederation showed that new vacancies and job placements were still falling fast in May, albeit at a slower pace than in April.

Illustrating the trend, Lloyds Banking Group (LLOY.L) said on Wednesday it was cutting a further 510 jobs, taking total job cuts since its takeover of floundering rival HBOS last year to nearly 3,000.

“The problem in the UK is not so much the near term as next year,” said Daiwa’s Ellis. “With credit growth still constrained, unemployment set to rise much further, and sterling showing signs of life, it is hard to believe that the economy will bounce back strongly in 2010.”

VocaLink, a company that handles many large firms’ salary payments, reported that take-home pay in the three months to May was just 1.1 percent higher than a year earlier, the smallest increase since the survey began in 2004.

And earlier this week, employers association the CBI said firms still expected banks to tighten conditions for new lending over the next three months, albeit at a slower pace than before.

Vicky Redwood, economist at Capital Economics, sounded a note of caution about the PMI data, which she and others have said understated the depth of the recession to date.

“The survey shouldn’t be taken entirely at face value. It was too upbeat relative to the official data in Q1 and other surveys — like that recently published by CBI/Grant Thornton —suggest output is still falling.

The services PMI data represents sectors that account for about 38 percent of British economic output, excluding retailers and government services that are also classified as service industries in Britain’s national accounts.

Economists polled by Reuters earlier in the month expected Britain’s GDP to fall by 0.7 percent between April and June after a bigger-than-expected 1.9 percent in the first three months of this year, and many expected 2009 to bring Britain’s worst downturn since the aftermath of World War Two.

(Editing by Victoria Main/Toby Chopra)

Additional reporting by Matt Falloon

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