UK economy ‘firing on all cylinders’

Economists have predicted that the UK economy could grow by at least 1 per cent this year after figures showed activity in the powerhouse services sector rose at its fastest pace for more than a year.

The stronger-than-expected performance from the sector, which accounts for some three-quarters of the economy, follows improved readings from both the manufacturing and construction sectors.

The purchasing managers’ index (PMI), complied by Markit and the Chartered Institute of Purchasing & Supply, rose to 54.9 in May, up from 52.9 the previous month. The reading was the strongest since March 2012, while new business activity hit a 39-month high.

Investec analyst Philip Shaw said: “It’s encouraging that all three PMI surveys have been positive this week. It follows a run of generally better-than-expected data and suggests the economy is on a firmer footing.”

The strong figures mean Bank of England policymakers are likely to keep interest rates on hold when they conclude their two-day meeting today, and no changes are expected to the Bank’s £375 billion quantitative easing (QE) programme.

Today’s vote will be the last overseen by outgoing governor Sir Mervyn King, and IHS Global Insight economist Howard Archer said more QE could still be on the horizon after Mark Carney takes over in July.

He added: “The May services sector purchasing managers’ survey not only adds to a recent stream of improved news on the UK economy, but is among the most encouraging of the lot given the dominant role of the services sector.

“It now looks increasingly likely that the UK economy will grow by at least 1 per cent in 2013. Still hardly great, but significantly better than seemed likely even a few weeks ago.”

The CBI is also predicting growth of 1 per cent this year, while the British Chambers of Commerce recently upgraded its growth forecast from 0.6 per cent to 0.9 per cent.

Chris Williamson, chief economist at Markit, said: “The UK economy has moved up a gear with all cylinders now firing.

“The data suggest that economic growth will have picked up in the second quarter compared to the 0.3 per cent increase in GDP seen in the first quarter, shaping up to reach 0.5 per cent if June sees sustained growth.”

There were further signs of continued recovery in the retail sector today as Visa said consumer spending in May was 1.3 per cent higher than a year ago – the strongest annual increase since October 2010.

Visa’s figures chime with recent statistics from the British Retail Consortium, which said like-for-like sales rose 1.8 per cent during the month, although there are fears that consumer price inflation, which eased to 2.4 per cent in April, could rise above 3 per cent in the near future.