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UK Service Sector Growth More Than Expected

Tuesday, 5 Mar 2013 | 5:32 AM ET
City of London
Vulture Labs | Flickr Open | Getty Images
City of London

Britain's services sector grew more strongly than expected in February and at its fastest pace in five months, suggesting the economy may narrowly avoid a triple-dip recession, a survey showed on Tuesday.

The Markit/CIPS Purchasing Managers' Index (PMI) for services rose to 51.8 last month from 51.5 in January, beating the median forecast of 51.0 in a Reuters poll of economists.

The sector's second consecutive month above the 50 line denoting growth contrasted with a surprise contraction in UK manufacturing last month. The country's construction sector also shrank in February.

Those surveys revived fears that Britain's economy was heading for a third recession in four years after it shrank in the last quarter of 2012.

Economists had also predicted that a weak reading in the services sector would all but seal the case for the Bank of England to announce this week that it would restart its program of government bond purchases.

"So far, the PMIs suggest that the economy will have grown by 0.1 percent in the first quarter, barely making up for any of the 0.3 percent decline seen in the final quarter of last year," said Chris Williamson, Markit's chief economist.

"However, growth could turn out stronger than this as there's good reason to believe that at least some of the weakness in manufacturing and construction was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March," Williamson said in a statement.

Markit said confidence among services firms continued to improve, with optimism about future business activity hitting a nine-month high of 67.6, a fraction up on January's 67.2.

But rising input costs squeezed operating margins, as competitive pressures continued to restrain pricing power.

The rate of inflation for input costs accelerated from January and was the sharpest in 14 months.

Including retailers and the public sector - which are not covered in Markit's survey - the service sector accounts for more than three-quarters of Britain's gross domestic product.

The survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants.

The service sector accounts for more than three-quarters of Britain's gross domestic product, including public services not covered in the survey.

The Bank of England's top policymakers meet on Wednesday and Thursday to decide whether to help the economy further, having already spent 375 billion pounds on government bonds.

A Reuters poll of economists conducted from Feb. 26 to 28 showed a 40 percent chance of the bank opting for more so-called quantitative easing this week and a 60 percent chance before the year is out.

Since the poll was taken, the unexpected contraction of manufacturing in January and other signs of weakness in the economy made the March 7 decision an even closer call, economists have said.

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