Services offers only highlight as recovery limps on

BRITAIN'S key services industry yesterday provided some cause for optimism on the economy as one of the most respected surveys of activity showed the sector expanded at its fastest rate in four months.

The latest purchasing managers' index (PMI) rose to 55.4 last month from 53.9 in June, with the increase in output accompanied by an equally robust rise in new business.

On the PMI scale, 50 divides growth and contraction, putting the services sector, which claims a 75 per cent share of overall UK GDP, on a firm footing. However, despite July's "surprise" outcome, the survey is not expected to sway the Bank of England's monetary policy committee (MPC) from keeping interest rates on hold at 0.5 per cent today.

Committee members are concerned about stubborn inflationary pressures and the squeeze on consumers, while the most recent GDP figures -which showed growth of just 0.2 per cent in the second quarter - also prey heavy on the minds of policymakers.

The US debt crisis and the troubles in the eurozone are similarly casting a dark shadow over confidence closer to home.

Economists believe UK economic growth will remain muted for the rest of the year and Bank of America Merrill Lynch economist Nick Bate yesterday downgraded his GDP forecast for 2011 to 1.2 per cent, from 1.3 per cent. He also pushed back his expectation of an interest rate rise until the third quarter of next year.

Bate said in a note that the "softening in economic prospects in recent weeks warrants interest rates remaining at… 0.5 per cent for longer than we anticipated".

Teodor Todorov, economist at the Centre for Economics and Business Research (Cebr), argued that although the PMI services survey was "promising", it provided "little support for the Bank of England monetary policy committee members to raise rates".

He pointed out that the survey showed a small drop in employment in the services sector last month, while prices only rose "marginally".

The PMI, which is compiled by research group Markit and the Chartered Institute of Purchasing & Supply, also revealed that business confidence remained "historically low".

The British Chambers of Commerce (BCC) is today urging the Bank of England to persevere with low interest rates as the global economic outlook looks increasingly uncertain.

David Kern, chief economist at the BCC, said: "We expect the MPC to keep interest rates on hold at its August meeting. While recent pessimism about the economy is unjustified, it is clear that growth needs to be boosted.

"Preliminary figures show that GDP growth slowed to 0.2 per cent in Q2, and there are worrying signs that UK manufacturers are facing difficulties."The international situation remains worrying, in spite of recent debt agreements in the eurozone and the US.

"The government's current austerity plan is vital to stabilise our public finances, but it will inevitably increase the squeeze on businesses and consumers. Given this, everything must be done to sustain the recovery."