Confidence rises as services sector rebounds (just don't mention the pound)

The services sector bounces back strongly - while the 'end' of the recession has boosted confidence...

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Last Updated: 31 Aug 2010

Here’s a reason to be cheerful this morning: after a limp January, the UK’s all-important services sector recovered strongly last month, with the leading index of activity in the sector showing a four-point jump. That’s the biggest month-on-month rise for three whole years; throw in the hopeful signs from our factories lately, and the prospect of the UK economy slipping back into recession this quarter looks pretty remote. In fact, some economists reckon it might grow as ‘much’ as 1%, which will be a big boost to consumer confidence. Although some might argue that the recent woes of the pound are a better gauge of the UK’s economic health…

The Purchasing Managers Index, compiled every month by the Chartered Institute of Purchasing and Supply/ Markit, is widely regarded as the best measure of activity in the services sector. So the fact that it rose from 54.5 in January to 58.4 in February – the biggest jump since early 2007 – is great news, and seems to prove the theory that last month’s figure was a blip, brought about by all that pesky snow. The PMI also showed a big upturn in new business wins, job prospects and price rises; again, all positive signs. In fact, it looks as though capacity is more or less in line with demand at the moment; so if activity keeps rising, it should mean more jobs. Hurrah!

So what does this mean for the wider economy, given that the services sector contributes the biggest chunk of GDP? Markit’s Paul Smith reckons the figures ‘confirm that the underlying trend in the private service sector remains positive and is on course to deliver a quarterly expansion above 1% in the first quarter’. And since the manufacturing sector recently recorded its strongest growth for 15 years, it does look as though the UK should actually see some decent growth in this quarter. Which should cheer everyone up a bit – Nationwide said today that the measly growth of 0.3% last quarter was enough to push consumer confidence to a two-year high in February. So imagine the excitement 1% or more would create.

Today’s news must have been good, because it even provided some respite for the poor old pound; after taking a hammering recently (it hit a nine-month low against the dollar this week), sterling actually inched back above the psychologically important $1.50 level this morning. Unfortunately, all of the factors that prompted the great sterling sell-off – fears of a hung parliament, the size of the budget deficit, the likelihood of huge spending cuts – are still very much on the cards. Today’s news bodes well for the short-term health of the economy, but our longer-term prospects remain much murkier.


In today's bulletin:

Confidence rises as services sector rebounds (just don't mention the pound)
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Strong medicine for AstraZeneca as 1,200 UK jobs go
Prudential looks East as UK shareholders baulk at AIG deal
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