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Services sector data: what the economists say

Guardian Economics 3rd June 2009

The purchasing managers' index (PMI) hit 51.7 last month, up from 48.7 in April, and crucially above the 50-mark that separates contraction from expansion

 

Colin Ellis, European economist at Daiwa Securities SMBC

"Today's key data release in the UK was undoubtedly the services PMI for May. The headline business activity index came in at 51.7 - higher than expected, and above the critical level of 50 that marks the difference between expansion and contraction. In fact, the index was the highest since March last year, before the onset of the recession, and was reflected by rises in new business and business expectations to fourteen-month highs.

 

"Today's reading is probably the first genuine bit of good news on activity for many months, as oppose to 'less bad' data. And it will bolster hopes that the UK economy as a whole can start growing sooner rather than later - GDP may well still fall in Q2, but a rise in the third quarter is looking more likely by the day. Yet the problem in the UK is not so much the near term as next year - with credit growth still constrained, unemployment set to rise much further, and sterling showing signs of life, it is hard to believe that the economy will bounce back strongly in 2010. Indeed, there remains a risk that consumer spending, in particular, could take another leg down towards the end of 2009, as job losses really start to bite."

 

Benjamin Williamson, an economist at the Centre for Economics and Business Research (CEBR)

 

"Today's release is the third in a row to show a sizeable increase in the Purchasing Managers' Index for its respective sector. The three major sectors of manufacturing, construction and services are all now showing their best pace of growth in at least a year. If the rate of change in activity continues in this way, all three sectors could see a return to positive growth within the next few months. This would mean an almost certain return to economic growth by the end of the year."

 

Howard Archer, chief European and UK economist at IHS Global Insight

"The purchasing managers' survey for the services sector showed activity expanding for the first time in 13 months in May, giving a major boost to hopes that the economy is close to at least temporarily stabilizing. At the worst, GDP seems likely to contract only modestly in the second quarter.

"Light currently seems to be burning much more brightly at the end of the recessionary tunnel and it is very possible that some limited growth could occur before the end of the year. However, economic and financial conditions remain very difficult and we suspect that relapses in activity are highly likely with the result that sustainable growth will not develop until 2010 and then only gradually. Indeed, despite the apparent return to growth in May, the services sector is still under serious pressure from weak consumer expenditure on services, reduced business spending, ongoing serious financial sector problems and the housing market downturn."

 

Peter Dixon, an economist at Commerzbank

 

"The sharp rally in the UK services PMI last month to 51.7 (consensus: 49.5) takes it back above 50 for the first time since April 2008. This puts the UK ahead of the US and eurozone in being the first of the major industrialised nations to register a PMI reading above 50. Moreover, a composite PMI, which gives a weight of 80% to services and 20% to manufacturing, is also now above 50 for the first time since April 2008. If the current reading is maintained in June, it would imply that GDP growth in Q2 was virtually flat.

 

"Although these numbers suggest that the economy is three months ahead in the cycle compared to expectations, we are not getting carried away. They merely suggest that activity growth is back to zero – they say little about the pace of recovery, which we believe will remain sluggish as the economy deals with the structural problems arising from a banking sector which is not yet operating efficiently. Moreover, the economy is being supported by huge fiscal and monetary policy injections and it is far from clear whether the economy will be able to 'walk unaided' as this support is withdrawn."

 

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