Service sector expansion to feed recovery expectations

Economists were today readying themselves for further positive news on Britain’s powerhouse services sector, adding to glowing reports for manufacturing and construction.

Growth forecasts for the third quarter have already been bolstered by a raft of upbeat indicators as exports gather pace and consumers hit the high street.

Analysts believe that a key poll of hundreds of purchasing managers, due to be released today by the Chartered Institute of Purchasing & Supply (Cips) and data analystics firm Markit, will add to the feel-good factor.

The service sector accounts for three-quarters of the UK economy and is the biggest contibutor to the nation’s output.

Yesterday’s sister survey by Cips and Markit covering the construction sector showed activity growing at the fastest pace in nearly six years in August, driven by residential building.

The report’s main activity barometer surged to 59.1 – its highest level since September 2007 – from 57 in July, the fourth month in a row that the reading has topped the 50 mark separating growth from contraction.

The outcome adds to mounting optimism over the wider economic recovery after Monday’s manufacturing purchasing managers’ index said factories were “booming again” following the strongest growth in output for nearly two decades.

A number of business bodies and think-tanks have upgraded their growth forecasts including the Organisation for Economic Co-operation & Development (OECD), which yesterday predicted gross domestic product (GDP) expansion of 1.5 per cent in the UK in 2013, up from a forecast of 0.8 per cent issued in May.

Howard Archer, pictured below, chief UK economist at IHS Global Insight, the forecasting consultancy, said the recovery was “becoming more broadly based”.

He said: “With the purchasing managers reporting that both manufacturing and construction activity saw improved, robust expansion in August, it is looking ever more likely that the economy can surpass the second quarter growth rate of 0.7 per cent in the third quarter.

“A robust August purchasing managers’ survey for the dominant services sector would really help matters further. We are currently expecting GDP growth of 0.8 per cent quarter-on-quarter in the third quarter, and we have lifted our GDP growth forecast for 2013 to 1.4 per cent.”

Despite its upgrade, the OECD warned that the global recovery from the prolonged downturn sparked by the financial crisis of 2007-8 was not yet assured, and said “unconventional” methods – such as quantitative easing – will continue to be needed to avoid “derailing” the return to economic health.

“A sustainable recovery is not yet firmly established and important risks remain,” the think-tank added.

The strong economic reports will put pressure on the Bank of England’s monetary policy committee, which meets today and tomorrow, to consider an earlier interest rate rise.