Modest services growth keeps UK on track for Q1 pickup

By @ibtimes on

The dominant service sector expanded less than expected in February, a business survey showed on Monday, but the economy still looks on track for modest growth in the first three months of this year after shrinking at the end of 2011.

Combined with evidence of growth in manufacturing and construction, the figures go some way to mitigate pressure on the government as Britain's leading business lobbies urge measures to support the tentative economic rebound in the budget statement due later this month.

The Markit/CIPS Purchasing Managers' Index (PMI) for services, published on Monday, fell to 53.8 from 56.0 in January, which had been a 10-month peak. The latest reading was below forecasts for a dip to 54.9, but stayed well above the 50 mark which separates growth from contraction.

Service firms' confidence about the year ahead hit the highest level in a year, with more than half of respondents showing optimism versus only a 10th who were downbeat. Employment in the sector also ticked up.

At a pace of 54, it's still a decent rate of expansion for the biggest share of GDP output, said Scotiabank economist Alan Clarke. The fact that (companies' business) expectations rose also raises hopes that this isn't the start of a down trend.

Other PMI releases have shown that growth in British manufacturing also slowed last month, whereas construction activity grew at the quickest pace in nearly a year.

Economists said the combined surveys pointed to economic growth in the first quarter, with some putting it at about 0.4 percent quarter-on-quarter after a 0.2 percent contraction in the last three months of last year.

Companion surveys for the euro zone emphasised the risk of recession in the region, Britain's main export market.

DANGERS

But in another sign that Britain is skirting the worst of the European malaise, Tesco Plc, the country's biggest retailer, announced plans to open new stores and create 20,000 new jobs in the country over the next two years.

Britain's recession-hit retailers, which are not included in the services PMI, saw surprisingly strong sales over the past few months as heavy discounts lured customers into shops, and many economists expect consumers to increase spending after years of restraint now that inflation is seen to be falling.

Risks to the economy still loom large, and a recent rise in oil prices has added to concerns that inflation may not fall as fast as hoped, continuing its squeeze on household budgets.

The British Chambers of Commerce forecast on Monday that Britain would avoid a recession and the Bank of England would not need to inject any more stimulus, but the recovery would be weak and the government should step up its efforts to boost growth.

Meanwhile, the Federation of Small Businesses called on finance minister George Osborne to set up a separate government body to defend the interests of Britain's 4.5 million small firms. It said the agency would allow a quick implementation of policies such as credit easing, announced in November to increase small and medium-sized enterprises' access to finance.

The PMI surveys support the Bank of England's prediction that Britain faces a bumpy road to recovery. Given recent signs of economic resilience, most economists expect the central bank to keep the target for its asset purchases unchanged at 325 billion pounds at its policy meeting this week.

Increased activity in the services sector was due partly to discounting, although growth in new business still slowed, while preparations for the London Olympics also boosted trade, Markit said. Financial intermediation saw the biggest rise in business.

Profit margins were squeezed, however, as the prices companies charged fell at the fastest pace since November 2009 while input costs continued to rise, albeit at the slowest pace in 1-1/2 years.

(Additional reporting by Sven Egenter, David Milliken and Fiona Shaikh; Editing by Ruth Pitchford)

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