Services sector boosts economy

The UK appears to have dodged another recession after stronger than expected growth in the powerhouse services sector in March, a survey claimed today.

The closely watched Markit/CIPS survey, in which a reading of above 50 represents growth, showed activity in the sector increased to 55.3 in March, up from 53.8 in the previous month and outstripping City expectations of 53.4.

March's acceleration, which was accompanied by an increase in jobs and reports of an improved economic climate, means the sector's activity in the first three months of 2012 grew at its fastest pace since the second quarter of 2010.

Markit chief economist Chris Williamson said the strong services data, which followed improving manufacturing and construction reports earlier this week, suggests the economy may have grown by as much as 0.5% in the first quarter of 2012 after a 0.3% contraction at the end of 2011.

He said the services sector, which has now grown for 15 months in a row, expanded by as much as 0.7% in the first quarter, making it a key driver in the UK's growth.

Last month, respected think-tank the OECD predicted that the UK's economy would shrink by 0.1% in the first quarter of 2012, meaning it would be back in recession - defined as two quarters in a row of contraction.

CIPS chief executive David Noble said: "The UK service sector has rounded off the first quarter of 2012 in confident fashion, with growth at its highest since the second quarter of 2010, showing that fears of a double dip recession were unfounded."

The report revealed a modest rise in employment in March, reflecting confidence remaining close to the previous month's 12-month high.

Over the first quarter of 2012 as a whole, staffing levels in the sector increased at its fastest rate for four years, in a boost for the Government's hopes that the private sector can start to replace some of the jobs axed from the public sector.

The report showed that new business increased at "a solid pace", with service sector companies reporting that their customers were more willing to make firm decisions.

However, there were also warnings that "this is no runaway recovery", as job creation and inflows of new work are still below rates generally seen before the recession.

And cost pressures remained, with oil prices pushing up the price of transport and leaving profit margins under pressure amid weak consumer spending.

Samuel Tombs, UK economist at Capital Economics, warned that the Markit data over-estimated the strength of the economy in the previous quarter because it did not take into account high street spending, which has been particularly badly hit in recent months.

He said: "Even if the economy did grow in the first quarter, the prospect of a renewed rise in tensions in the eurozone, further fiscal austerity and high oil prices suggest that the economy will struggle to expand in the coming quarters."

Earlier this week, the Markit/CIPS surveys revealed the construction sector saw new orders rise at the fastest rate in four-and-a-half years, while activity in the manufacturing sector hit a 10-month high.

PA