UK service sector activity boosts hopes for strong growth

Activity in the UK's dominant service sector has accelerated to its fastest pace since last summer, boosting hopes for a strong first quarter of overall economic growth.

The Markit/CIPS service purchasing managers' survey rose to 58.9 in March, its strongest reading since August last year and up from the 56.7 recorded in February.

Chris Williamson, chief economist at data provider Markit, said the UK economy "moved up a gear" in March, forecasting growth of 0.7 per cent in the first quarter, reviving from the slowdown late last year.

"Faster growth of new business and improved expectations of prospects for the year ahead also bode well for the upturn to retain strong momentum as we move through the spring," he said.

Sterling rose for a second day against the euro on the data, to 73.04p per euro, 0.5 per cent higher on the day.

While the higher than expected survey reading was widely welcomed by city economists as reassurance that the economic recovery still has momentum despite jitters caused by the general election, most were cautious about whether the first-quarter GDP reading would be as strong as Markit predicted.

George Buckley, chief UK economist at Deutsche Bank, said the weak official monthly data in construction, industry and services "suggests such a strong reading may be difficult to achieve."

Alan Clarke, economist at Scotiabank, said that while the survey was "absolutely flying" this was unlikely to be reflected in the GDP data until the second quarter of the year.

This Friday will see the release of official figures for industrial production and construction, which will give more information about the likely rate of growth in the overall economy, which was revised up to 0.6 per cent for the fourth quarter.

Respondents to the PMI survey said the growth in activity was due to a wider recovery, improving confidence, winning new customers and new product development.

A number of companies indicated that the weaker euro had helped them hold down prices, despite rising wage pressures.

While the Conservative and Liberal Democrats are hoping to capitalise on the continuing run of economic good news, including falling unemployment and low inflation, minutes from the Financial Policy Committee show that policy makers at the Bank of England are concerned there are still "significant external risks to financial stability".

It says BoE staff have been working closely with the Treasury to ensure there are contingency plans in place in case the Greece debt stand-off escalates.

It also notes that members are closely watching the UK's large current account deficit, currently standing at 5.5 of national income, the largest annual deficit since records began in 1948, which could "in adverse circumstances trigger a deterioration in market sentiment" towards the UK.

It will keep their "assessment of this risk under close review and would monitor the maturity and liquidity of the financing of the deficit," the minutes record.

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