UK services growth: what the economists say

Britain's services sector enjoyed a much stronger start to the year than expected , according to a survey that has boosted hopes recession may still be averted Vicky Redwood, chief UK economist at Capital Economics Together with the rise in the manufacturing PMI, this means that a weighted average of the CIPS surveys is now consistent with quarterly GDP growth of about 0.7%. Admittedly, the surveys have not been a foolproof guide to the official data recently, and other indicators – such as the Bank of England's agents' scores – have been weaker. Nonetheless, it is looking more hopeful that the economy will expand in Q1 and therefore temporarily avoid a technical recession – although how long this pick-up lasts is another matter. James Knightley, senior economist at ING This is the strongest reading since March last year and follows on from a healthy rise in the manufacturing survey on Wednesday. With both series in firm growth territory it offers clear hope that the UK can avoid a technical recession following the drop in GDP in the fourth quarer for 2011. However, we remain cautious that consumer spending still accounts for the best part of two thirds of economic activity and that remains constrained by rising job insecurity and negative real wage growth. That said, with the business expectations component improving nicely it does offer hope that firms will start to hire workers and invest more in the economy and that if the UK does dip into recession it will be shallow. It also makes it likely that QE is expanded by £50bn rather than £75bn next week by the BOE. David Tinsley, UK economist at BNP Paribas The doomladen forecasts of recession in the UK are further cast into doubt today by a surge in the UK services PMI in January ... If it continued across the quarter it would probably be consistent with service sector growth of over 0.5% on the quarter - a far cry from the contraction in GDP some forecasters are still talking about. As we have been saying for a number of weeks, there has been a distinct and unmistakeable improvement in the UK outlook of late. And it's unlikely that the UK will enter recession. Indeed, if this week's PMI's are continued, or even bettered, in the coming months then the UK economy could be looking at a solid rate of growth in 2012. Alan Clarke, economist at Scotiabank For the second month in a row, the UK CIPS services survey surprised significantly on the upside, jumping by a further 2 points 56.0 – a 10 month high. A reading as high as that has typically been associated with GDP growth in the region of 0.6% quarter on quarter. This seriously puts the cat amongst the pigeons ahead of next week's Bank of England decision. In light of the much stronger than expected CIPS surveys, coupled with increasingly robust survey indicators on the continent, there is a genuine risk that the MPC actually sits on its hands and does not increase its asset purchases any further at next week's meeting. Howard Archer at IHS Global Insight It remains to be seen though whether this improvement in services activity can be sustained as there are still indications that activity in professional, business and financial services is being limited by difficult conditions in the private sector as well as by the cutbacks in government spending. Meanwhile, consumer-facing services companies are being hit by the serious squeeze on consumers' purchasing power and their need/desire to limit their discretionary spending. Significantly, the Bank of England's regional agents reported in their January summary of business conditions that "the growth rate of turnover in business services continued to ease, due to slowing demand growth and downward pressure on price inflation, particularly among professional and financial services."