UK 'on the road to recovery' after services-sector boost

Published on Monday 5 October 2009 21:31

BRITAIN'S crucial services sector expanded at its fastest rate for two years in September, figures yesterday revealed, sending the strongest signal yet that the UK economy is firmly on the road to recovery.

A further boost is expected today when new cars sales figures are tipped to rise for the third consecutive month.

Growth in the services sector, which accounts for some 70 per cent of total UK economic output, heavily outpaced City forecasts, sparking fresh expectations that Britain exited the recession in the third quarter.

Andrew Goodwin, senior economic advisor to the influential Ernst & Young Item Club, said: "The two-year high in activity provides further evidence that the UK economy is firmly on the road to recovery. These results strengthen our belief that GDP growth will be positive in Q3. And growth is likely to accelerate further in Q4 as the impending VAT increase encourages consumers to bring forward their planned purchases."

The surprise surge in services activity and confidence helped to steady the markets yesterday, breaking five days of losses for the FTSE.

September's rises mark the fifth successive month of growth in the services sector, which encompasses everything from banks and legal firms to hotels and restaurants.

However, economists also sounded a note of caution as the data showed a continued deterioration in prices. Deflation has now dogged the sector for 11 months. The amount of spare capacity similarly gave rise to warnings that the recovery is likely to be "anaemic".

Paul Smith, senior economist at Markit, which produces the data along with the Chartered Institute of Purchasing Supply, said: "With households and businesses continuing to rebuild their balance sheets, and the positive effects of loose fiscal and monetary policy likely to fade, the scenario of an anaemic growth path remains the best forecast at the present time."

Job losses in the services sector continued to prove an area of concern, with the pace accelerating in September. Vicky Redwood of Capital Economics warned: "We continue to have our doubts about how strong any further recovery will be."

Goodwin added: "It is important not to get too carried away. The economy is coming off a deep slump and the recovery is at a very early stage."

The headline purchasing managers' index figure for the service sector rose to 55.3 in September from 54.1 in August, beating City forecasts of 54.5 – 50 denotes the dividing line between growth and contraction.

Expansion was driven in particular by hotels, restaurants and business-to-business service companies, the research revealed, while activity among transport, storage and communication, and personal services sectors continued to suffer.

The Bank of England's quantitative easing (QE) programme was credited with driving the expansion. Alan Clarke, UK economist at BNP Paribas, said: "I've estimated that the PMI surveys are roughly five points stronger than they would have been without QE."

FEAR OF A SECOND DOWNTURN HOLDS BACK EXPANSION

HSBC chief executive Michael Geoghegan has delayed expansion plans because of concerns over a second downturn.

Geoghegan said he was concerned about "growing too fast" before the recovery had fully taken hold.

The chief executive said he was not as convinced as others that the worst is over and warned that the economy could encounter a second slump before repairing – a so-called "W-shaped" recovery.

He was speaking in the wake of a reshuffle at HSBC which will see Geoghegan based in Hong Kong rather than London and involve him taking on responsibility for developing group strategy.

"Is this a V recovery or a W?" he said. "(I think] it's the latter. (If I'm right], we have to be very careful we don't grow the balance sheet so far before the recovery has come only to write it back into the impairment line later on."

Another senior executive said HSBC might look to make medium-sized purchases. He said a 5 billion acquisition could be a possibility, with subsidiaries of Lloyds Banking Group among potential targets.