Smiling purchasing managers boost Sterling

The latest PMI services survey shows encouraging results, but that doesn't mean it's plain sailing from here on in.

by Emma Haslett
Last Updated: 04 Nov 2010
A report has shown that despite rather gloomy expectations, growth in the UK service sector rose last month – an indication that the economy is continuing to recover after the recession. The purchasing managers’ index, produced by data company Markit, rose from 52.8 in September to 53.2 last month (any figure over 50 shows expansion) – rather embarrassing forecasters, who had said it would drop to 52.5. In fact, so encouraging is the figure (or so desperate for good news are the markets) that it has actually managed to boost Sterling. The positive index also means the Bank of England might not have to follow the US Federal Reserve down the path of further quantitative easing. But businesses aren’t cracking out the party poppers just yet – this data could yet be undermined.

The news is particularly positive because the services sector is so large, representing about three quarters of the UK economy. And it’s the second upbeat PMI survey to come out this week: on Monday a similar report showed that growth in the manufacturing industry is also much stronger than expected, while figures out last month showed that the economy as a whole has grown at 0.8%: it may not break records, but it’s a start. Traders certainly seem impressed: the pound has risen by about 0.5%, to $1.614 or €1.148.

But some questions remain to be answered. The survey also showed that managers are struggling to afford higher prices within the sector, while the number of jobs it provides may also have dropped slightly. On top of that, it’s anticipating a below-average contribution to GDP in the next few months – and given the size of the sector, that could prove to be significant. It all depends on how it fares after a hike in VAT, due in January (and, judging by the fact that a large chunk of it is made up of retailers, we’d guess the answer would be ‘not brilliantly’).

Still, it at least provides an indicator of what the Bank of England’s monetary policy committee will decide about further quantitative easing when it meets on Thursday. There had originally been expectations that it would follow in the footsteps of the US Fed, which is almost certainly going to announce another round of QE later today. But now that we’ve seen a few signs that the recovery is still coming along nicely (although, admittedly, not quite as speedily as we would have liked), that probably won’t be necessary. Although businesses may wish to suspend judgement until January.

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