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Services boost eases fears of triple dip

  • @Benchu_

Britain's services firms registered a surprise pick-up last month, prompting some to hope that the country could yet avoid an unprecedented triple dip back into recession.

The Chartered Institute of Purchasing & Supply's February survey reported the strongest growth in five months for a sector that accounts for more than three-quarters of UK output. The Cips activity index, where a score over 50 signals growth, improved to 51.8. This is the second month in a row that it has been in positive territory. Firms won new work at the quickest pace since last May and confidence hit a nine-month high.

"This outcome is hardly screaming out that better growth is on the way," said Alan Clarke of Scotiabank. "Rather, it is something of a relief that the survey has held on to last month's gains, making it more likely than not that the UK will avoid a triple dip."

The British economy contracted by 0.3 per cent in the final quarter of 2012 after an Olympics-fuelled bounce of 1 per cent in the third quarter. Another quarter of contraction between January and March this year would put Britain back in recession again, for the third time in five years.

Analysts had been braced for more bad news after disappointing activity updates from surveys of manufacturers and builders. The expectation had been that bad news would prompt the Bank of England's Monetary Policy Committee into voting to extend its £375bn quantitative easing programme tomorrow. But the improvement in the crucial services sector gives the MPC a headache over whether to pump billions more stimulus into the economy. The Bank's Governor, Sir Mervyn King, is one of three rate-setters calling for more action, alongside external member David Miles and the Bank's head of markets, Paul Fisher. Other considerations for the committee will be Italy's inconclusive election result and the onset of "sequestration", automatic spending cuts in the United States, which kicked in on Friday.

Vicky Redwood, of Capital Economics, said: "The improvement in February's UK Cips report on services could well be the decisive factor that stays the MPC's hand. Had the survey fallen sharply like last week's manufacturing PMI, those on the MPC wanting to do more QE might have mustered a majority. But the rise in the services activity balance probably tips the balance towards the MPC doing nothing."

The MPC is disregarding inflation, above its target at 2.7 per cent, for now, although the sluggish start to its Funding for Lending initiative will also give the committee food for thought. Lending contracted by £1.5bn in the second half of last year, figures this week showed.

Cips said its surveys signalled 0.1 per cent growth in the first quarter of 2013, leaving the UK avoiding a triple-dip recession by a narrow margin. And its chief executive, David Noble, said the improvement among services firms "suggests we might be heading in the right direction at last". Retailers also saw the strongest growth for three years in February, according to the British Retail Consortium.

The Royal Bank of Scotland analyst Ross Walker said: "With stock markets rallying, 10-year gilt yields holding below 2 per cent and trade-weighted sterling down 6 per cent since the start of this year, it is difficult to see what is the pressing need for a QE extension this week."