Recovery could arrive much sooner than expected

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The Independent Online

One of the most eagerly awaited and bullish indicators of recovery in the British economy was published yesterday. The latest survey of business confidence in the services sector showed that output may already have started to rise in that part of the economy – which comprises 70 per cent of the total.

The Chartered Institute of Purchasing and Supply's poll is an index where a reading above 50 implies expansion and one below that contraction. Having remained stubbornly below the 50 mark since March 2008, it rose to 51.7 in May, ahead of market expectations.

Importantly, it follows better readings for the construction and manufacturing sectors, and a composite reading for the three – 50.4 – suggests that the economy may still contract in the second quarter, but only very marginally, with a return to positive growth likely by the end o f the year. A spokeswoman for Markit, which conducts the survey, said that "the UK is the first of the European economies to see a return to economic growth".

Parallel data released in Europe also showed an improvement. Yet doubts surround the strength and sustainability of recovery. Vicky Redwood, UK Economist at Capital Economics, commented: "Even if the surveys show a similar increase in June as they did in May, a weighted average of the three would be consistent with a small fall in GDP in the second quarter of around 0.2 per cent." Official data show that the economy shrank by 1.9 per cent in the first quarter.

Manufacturers are seeing no improvement in access to finance, the Engineering Employers' Federation added.

Observers also say the latest data is unlikely to alter Bank of England policy radically. The Bank's Monetary Policy Committee will announce its latest decision at midday today. Howard Archer, of Global Insight, said: "The Bank is unlikely to be hugely swayed by the survey indicating modest growth and it seems likely to keep interest rates down at 0.50 per cent deep into 2010.

"The Bank may very well also further extend its quantitative easing programme, but probably not today."

Incomes Data Services (IDS) added that pay rises had subsided from 3 per cent to 2 per cent, with pay freezes increasingly common in manufacturing.