Services sector growth welcomed


A run of dire economic data that has spooked the UK's recovery hopes was halted today with a decent performance by the powerhouse services sector.

The Markit/CIPS survey for overall services activity, in which a reading above 50 represents growth, came in at 53.3 in May, unchanged from April and its 17th month of growth in a row.

The healthy figure follows data revealing a deeper-than-previously-estimated recession, a plunge in manufacturing activity and the worst retail sales in nearly two-and-a-half years.

Howard Archer, chief UK economist at IHS Global Insight, said: "Given the dominant role of the services sector in the economy, the steady growth in May reported by the purchasing managers is welcome news and supports hopes that it can avoid further contraction in the second quarter."

The services sector, which makes up around 75% of the total economy, was boosted by a rise in incoming new business, which hit a four-month peak, driven by increased marketing, Markit said.

The survey was seen as a key factor in today's deliberations by Bank of England policymakers on whether to boost stimulus measures for the UK economy.

The economy shrank by 0.3% in the first three months of the year, meaning the UK is in technical recession - defined as two quarters of decline in a row - following a 0.2% fall in the final quarter of 2011.

The latest Markit/CIPS survey on the manufacturing sector, published last Friday, revealed a sudden and sharp turn for the worse in May.

The sector suffered its second-steepest fall in the survey's 20-year history and came as new orders dropped at the fastest pace since March 2009.

But today's services result, combined with a decent construction sector report published yesterday, should restore some confidence in the overall recovery.

Markit said service sales volumes were in part supported by a reduction in output charges in May as clients pushed for discounts and competition for new business remained fierce.

Despite the fall in charges, pressure on margins was partly alleviated by a marked slowdown in average input costs, Markit said.

And given the positive trend in incoming new business, service providers added to their staffing levels during May.

Looking ahead, businesses remained positive but confidence weakened to its lowest level since last December due to fears over public sector spending cuts and the impact of the eurozone debt crisis.

Paul Smith, senior economist at Markit, said: "Although we remain convinced that the GDP figures are overstating the extent of the downturn - and this view is borne out not only by the surveys, but also by labour market data - it's hard to get away from the fact that the UK economy remains relatively fragile."