UK economy grinding back to life?

New data that show a much stronger-than-expected surge in the service sector could mean that the economic recovery is finally in sight.

by Michael Northcott
Last Updated: 19 Aug 2013

One of the key economic indicators, the Purchasing Managers’ Index for services, rose to a point score of 54.9 in May, compared with 52.9 the previous month. That is the best we’ve seen since March last year and is well above what the City was predicting. Most analysts thought the figure would come in at 53 on the nose. For the uninitiated, anything above 50 represents growth.

The report also yielded encouraging news about other sectors – May marked the first month since March 2012 that every sector of the economy, including manufacturing and construction, was growing. The good news about services’ growth in particular, is that this sector is responsible for about 75% of UK GDP, so rapid growth here is good news for the entire economy.

Chief economist at Markit, Chris Williamson, says: ‘The UK economy has moved up a gear with all cylinders now firing. The data suggest that economic growth will have picked up in the second quarter.’ It is too early to tell whether Markit is spot on – it’s worth waiting for the Office for National Statistics to produce its report, too – but this is a promising early indication. 

So where has this growth come from? Analysts say that a mix of heavy promotional pricing, and new product launches have helped companies in all sectors to stimulate extra revenue. New business actually showed a reading of 57.2. Williamson adds that these figures could amount to a 0.5% growth figure by June if the momentum is kept up. 

He says: ‘There’s good reason to believe that growth can accelerate further. Across all three sectors, new business showed the largest jump for three years in May. Firms are also taking on staff in incre4ased numbers, responding to the brightening outlook.’ He also predicts that the Bank of England will not go for any further quantitative easing under new governor Mark Carney, since the economy is ‘already showing signs of acquiring ‘escape velocity’.’

It’s worth taking optimistic figures like these with a pinch of salt, since stock markets and economic outlook can very easily be knocked by what happens across the Channel, and the eurozone is still having a torrid time, albeit not featuring on the front pages every day like last year.

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