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Rise in UK January Services PMI Eases Recession Fears

Reuters
Friday, 3 Feb 2012 | 5:48 AM ET

Britain's dominant services sector expanded at the fastest pace in 10 months in January and firms grew much more optimistic, a survey showed on Friday, crowning a raft of data this week that raised hopes the economy may avoid recession.

Steve Allen | Photodisc | Getty Images

The figures will be food for thought for the Bank of England as it considers whether to extend its quantitative easing programme of gilt purchases next week, after the completion of the 75 billion pounds it started in October.

The Markit/CIPS Purchasing Managers' Index (PMI) for services rose to 56.0 from 54.0 in December, confounding forecasts for a dip to 53.5 and climbing higher above the 50 mark which separates growth from contraction.

The surprise improvement in the sector follows PMI releases showing that manufacturing unexpectedly returned to growth last month, while construction firms became more upbeat despite a slower expansion in activity.

"All (this) points to a resounding revival of UK economic growth in January," said Chris Williamson, chief economist at survey compiler Markit.

"A slide back into recession is now looking increasingly unlikely. The economy could well expand at close to trend rate - around 2-2.5 percent per annum - in the first quarter if business conditions hold up in the next two months," he added.

Britain's economy shrank in the final quarter of 2011, as manufacturers and construction companies scaled back production. Another consecutive quarter of contraction would tip it into recession.

However, Markit's forecast contrasts sharply with that from the National Institute of Economic and Social Research (NIESR) earlier on Friday, which forecast a 0.1 percent drop in GDP for 2012 as a whole.

Most economists are convinced the BoE will approve another 50-75 billion pounds of QE, and several policymakers have said that falling inflation gives them scope to consider further purchases to boost sluggish growth.

Activity in the service sector increased above trend on the back of the strongest rise in new business since July, Markit said, noting evidence of improved confidence among clients.

Hotels, catering and restaurants, and personal services recorded the largest gains in activity.

Business expectations made the biggest monthly jump since records began in 1996 - rising from 63.5 to 70.3 - to stand at the highest level since May.

Half of respondents forecast better activity in a year's time and only 10 percent signalled a deterioration.

Moreover, employment in the sector expanded at the fastest rate in almost four years, fuelled by an inflow of new business and expectations of further growth.

Williamson said the figures added to hopes that "this upturn may prove to be more than a flash in the pan and can start to look like a sustainable, job-creating, recovery".

Input price inflation weakened in January to the lowest in well over a year, pressured by lower energy bills, while average prices charged by service companies were little changed.