Services data ease fears of weakening UK recovery

Activity in the UK services sector accelerated in April, calming concerns that the overall economic recovery is slowing.

The Markit/CIPS survey of purchasing managers ticked up from 58.9 to 59.5, its highest level since August 2014 and well above the 50 mark which separates expansion from contraction.

The survey gives some reassurance on the general state of the economy after official GDP data for the first quarter showed the pace of growth halving from 0.6 to 0.3 per cent and weakness in the dominant service sector.

Chris Williamson, chief economist of survey data compiler Markit, said it looked like the economy had rebounded from the start of the year and was now showing "robust growth momentum".

However, with construction and manufacturing PMIs weaker in April, he added there were "warning lights flashing about the sustainability of growth".

"Rather than rebalancing towards manufacturing, economic growth has become increasingly reliant on the service sector, and the consumer is having to drive growth as investment spending remains disappointingly weak amid heightened political uncertainty," Mr Williamson said.

Ross Walker, senior UK economist at RBS, said the survey had a "surprising spring in its step", with the reading comfortably ahead of consensus city expectations.

While the figures would "help assuage concerns about a more acute slowdown", he cautioned that other data were "more ambiguous" and that the PMIs had overestimated the strength of official data over the past year.

There were also conflicting signs in the detail of the survey about the outlook for inflation. While the prices charged by service providers fell for the first time since October, and at the fastest rate in over three years, input prices moved upwards with firms reporting rising wage pressures.

Sam Hill, senior UK economist at RBC Capital Markets, said the "crunch time" for the economy would come after the election. He added: "Given the fall in the jobless rate, wage growth should be sufficiently underpinned to lead to some upward pressure on output prices."

After five years of falling real wages, low inflation has meant that take-home pay has started to rise over the past few months. But despite signs from private sector surveys that a tighter supply of labour is giving employees more bargaining power, official data remain weak.

The latest statistics show average pay is just 1.7 per cent higher than a year ago, but before the financial crisis it typically rose around 4 per cent a year.

The Bank of England will deliver its regular quarterly update on growth, inflation and interest rates next week. Markets are betting an initial rate rise will not come until mid-2016.

Earlier on Wednesday, the National Institute for Economic and Social Research lowered its forecast for growth this year to 2.5 per cent, down from the 2.9 per cent it forecast in February.

It said that while the first quarter was "considerably weaker than expected" this was likely to be a "temporary deceleration", with growth driven largely by consumer spending and the sharp fall in oil prices rebounding through the remainder of the year.

The think-tank added that productivity growth remained the "largest single uncertainty" facing the UK, and while faster growth would ease fiscal pressures and boost living standards, even slower growth would "make matters considerably worse".

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