Service sector growth knocks prospect of rate cut

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The Independent Online

Growth in the UK's massive services sector surged to its highest level for 20 months in December, boosting hopes of economic recovery this year but knocking talk of a further cut in interest rates.

A snapshot survey of managers in the sector, which is closely watched by the Bank of England, showed an increase in output, new orders, employment and optimism.

But the news was tarnished by a separate report showing company failures hit a three-year high in 2005 and warning of more to come.

An index of activity in the sector, which makes up two-thirds of the economy, by the Chartered Institute of Purchasing and Supply, rose to 57.9 from 55.8 in November, on a scale where a number greater than 50 denotes expansion.

The number was much higher than forecasters had expected and was the biggest increase since April 2004, Cips said. "The vast majority of companies cited an increase in volumes of incoming new work as the principal factor underpinning higher activity," it said.

The survey also showed companies raised their prices last month, which analysts said gave ammunition to members of the Bank of England's Monetary Policy Committee who wanted to prevent a rate cut.

James Knightley, a UK economist at ING Financial Markets, said: "New business, employment and prices paid and received all rose, which will diminish the chances of a near-term interest rate cut from the Bank of England."

Howard Archer, a UK economist at Global Insight, added: "Indeed, this will raise speculation that the next move in rates could be up."

The surge in growth offset disappointing Cips surveys of manufacturing and construction and mixed news from high street retailers, which are not included in the services survey.

A separate report from Experian, the information provider, showed the number of business failures hit a three-year high in 2005. Meanwhile, profitability of companies outside the finance sector eased back from a seven-year high during the third quarter of 2005. Their net rate of return eased to 13.4 per cent from a revised 13.8 per cent in the second quarter. Profitability for services and oil firms rose, while manufacturing declined.

Roger Bootle, an economic adviser at Deloitte, said the fall "could well mark the start of a rather bleaker period for the UK corporate sector, as internal funds begin to dry up".

The growth in services was matched in the eurozone and the US, boosting hopes that the world economy would continue to post robust growth in 2006. The US services industry expanded further in December, as inflation within the sector eased, and new orders rose. The Institute for Supply Management reported its non-manufacturing index rose to 59.8, from 58.5 in November, above forecasts for a rise to 59.0. Meanwhile, the number of US workers seeking new jobless benefits fell last week to its lowest in more than five years.