LONDON (Reuters) - The service sector activity unexpectedly logged its fastest pace of growth in over a year in March, a survey showed, pointing to a 0.8 percent expansion in the economy as a whole in the first three months of 2011.
The Markit/CIPS services PMI index, a measure of activity growth as reported by purchasing managers, surged to a 13-month high of 57.1 in March from an unrevised 52.6 in February, beating even the most optimistic analyst’s forecast.
Sterling strengthened by more than half a cent against the dollar and gilt futures extended losses to hit a session low, underperforming German government bonds, as investors priced in a greater chance of an early Bank of England rate rise.
“When you look at where the Bank of England has typically raised interest rates in the past, the average level of the PMI is not that much different to where it stands right now, so it is consistent with higher rates,” said Deutsche Bank economist George Buckley.
There is a question mark over the sustainability of the increase, however, as some firms reported benefiting from a spurt of public spending in March, the end of the last fiscal year before big government spending cuts begin in earnest.
The 4.5 point rise in the index is the second-biggest increase since the survey started in 1996, and was only exceeded in January this year, when activity rebounded strongly after contracting due to December’s unusually heavy snow.
Data company Markit said that based on March’s figures it estimates that British GDP grew 0.8 percent in the first quarter of the year, up from a 0.5 percent forecast after February’s PMI data for the services, manufacturing and construction sectors.
The strength of first-quarter GDP is seen by most economists as the key to whether the Bank raises interest rates in May from a record low of 0.5 percent.
Three of the nine members of the Bank’s Monetary Policy Committee supported a rate rise in March, but the others worried that Q4’s shock GDP contraction could mark the start of an extended period of sub-par growth.
Economists cautioned against expecting a rise in interest rates at Thursday’s Bank meeting.
They contrasted the strength of the PMI with the weaker picture painted by a quarterly survey from the British Chambers of Commerce released earlier on Tuesday.
“The detail of the survey was less encouraging than the headline figure. Business expectations actually fell,” said Capital Economics’s Vicky Redwood. “Other news on the recovery — particularly on the consumer sector — has been much worse of late.”
Markit economist Paul Smith said it was unclear whether March’s data was a blip or marked the resumption of solid growth in the services sector, which must grapple with weak consumer sentiment and public spending cuts.
“Service providers remain very cautious about expanding headcounts in the face of numerous economic headwinds,” he said.
“The degree of confidence regarding prospects for the year ahead slipped lower, and cost pressures remained elevated, leading to doubts over whether the rate of services growth seen in March can be sustained in the coming months.”
Some firms reported a boost to business from public sector bodies using up their budgets before the end of the fiscal year — money which is unlikely to be so readily available in future as a four-year programme of roughly 20 percent spending cuts takes effect across most government departments.
The survey’s new business index rose to 55.6 from 53.4, its highest level since March 2010. The amount of outstanding business increased for the first time since September 2007, and firms hired more people for the first time since June last year.
The Markit/CIPS survey does not include state-provided services or the beleaguered retail sector, and so accounts for about 40 percent of GDP compared to around 75 percent for the service sector as a whole.
Personal services, such as hairdressers, were the fastest growing segment. But more of the index rise was driven by the business services component, which includes firms that rent machinery, conduct research and development or otherwise benefit from growth in Britain’s export-led manufacturing industry.
Since the end of the recession, manufacturers have benefited from the sharp fall in sterling that took place between 2007 and 2008, but retailers have suffered from weak consumer demand, especially after a rise in sales tax at the start of this year.
Editing by Hugh Lawson