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UK service sector records unexpected return to growth

Guardian Economics 3rd June 2009

• Hopes raised that the worst of the recession may be over
• Optimism hits six-month high
• Job market deteriorated at slower pace in May


The UK economy may return to growth in the next few months, economists predicted today, after the UK's dominant service sector returned to growth in May.

Data released this morning showed an unexpected increase in services activity, driven by a rise in new business. 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.

Analysts, who had predicted a figure of 49.2, said the PMI survey suggested the worst of the recession was over. Although the economy is expected to have shrunk between April and June, there is a growing feeling among economists that a recovery will have begun by the autumn.

"Today's reading is probably the first genuine bit of good news on activity for many months, as opposed to 'less bad' data," said Colin Ellis, the European economist at Daiwa Securities.

"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," he added.

Ross Walker of Royal Bank of Scotland said the data was encouraging, especially as the slump in the services sector had been a major factor in the scale of the economic downturn. He predicted that the economy could return to growth in the third quarter of this year.

Vicki Redwood of Capital Economics cautioned that the survey has been unduly optimistic in the past, but agreed that the trend is "clearly up".

The UK economy contracted by 1.9% in the first quarter of this year, its worst performances since 1970. Analysts believe it will continue to shrink in the current quarter, but at a slower rate. This was backed up by data earlier this week showing that the downturn in the manufacturing sector is easing.

Europe's service sector also enjoyed a small bounce in May, hitting a seven-month high of 44. However, the wider eurozone economy shrank more than expected in the first three months of 2009. Data released this morning showed it contracted by 4.8% compared with a year ago, the worst quarterly performance on record and more severe than the 4.6% previously expected.


Rising confidence

The PMI survey was published just hours after another report showed that public optimism about the state of the UK economy is at its highest for six months.

The Nationwide consumer confidence index reached 53 in May, up from 51 in April, reaching its highest point since last November. Martin Gahbauer, the building society's chief economist, said the public appeared to be more upbeat about the future, despite the depth of the UK economic downturn.

"What is clear from our findings is that, while consumers remain pessimistic about the present situation, they appear to be much more confident about the future than they were at the beginning of the year," said Gahbauer.

However, he also cautioned that "as we continue to see contrasting news about the state of the economy, it is likely that confidence will remain fragile."

The Nationwide consumer confidence index is designed to measure the population's view of the current position and future prospects of the UK, including the general economic situation, employment conditions and personal expectations of the months ahead.

The survey has been running for five years and this month's reading of 53 is still one of the lowest recorded. It was dragged down by a very low reading for the current situation, with just 6% of people thinking the economy was in good shape.

In another sign that the UK economy may be taking some faltering steps towards recovery, a separate survey published today found that the job market deteriorated at a slower pace in May.

Although the number of vacancies and appointments continued to fall, the Recruitment and Employment Confederation and KPMG Report on Jobs found there was more demand for agency workers.

"For the third successive month, we have seen a slowing in the rate of decline in both temporary and permanent staff appointments. Demand for staff is still falling but much less fast than at the beginning of the year and many employers seem to be holding off shedding staff and contemplating recruitment," said Mike Stevens of KPMG.

The pound continued its recent rally today, hitting $1.6661 against the dollar, its highest level since the end of October. It also hit a six-month high against the euro, at 1.1648.

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