UK service sector grew far more than expected in January, PMI shows -UPDATE

Date: Friday 03 Feb 2012

The Markit/CIPS purchasing managers’ index for the month of January has come in at 56 points, versus a reading of 54 for the month before.

The consensus estimate was for a reading of 53.

Today’s data has led some economists to cautiously wonder out loud if recent (yesterday’s) recession fears may not have been a tad overdone. Critically, they still expect the Bank of England to go through with a further round of asset purchases, although policy makers at the Bank may now have some extra food for thought.

Particularly worth noting, business confidence registered the largest one month rise in the survey’s history (rising to 70.3 from 63.5 the month before) while the employment sub-index increased by the most in nearly four years (to 52.2 from 50.1). Likewise, the improvement seen in the headline business activity index marked the third consecutive monthly gain in the index, the best run for over two years.

Of particular interest, Markit reports that there was also evidence of improved confidence amongst clients and an increased willingness to commit to new work.

As well, volumes of incoming new business grew by their strongest since last July. Thus, the new business index increased by 0.8 points to 55.0.

To be seen now is how the above data may influence the Bank of England’s decision making process.

Commenting on the data, David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply said that, “compared to the volatility seen through most of last year, sustained and accelerated growth in the service sector is welcome news. A record improvement in the degree of optimism and the highest increase in employment in nearly four years represents a tentative vote of confidence for the year ahead.

“Lower energy bills and overall weaker input cost inflation are also helping to ease the squeeze on margins and improve profitability across the sector as a whole.

“This optimism, however, is accompanied by continued challenges. Unpredictable external factors across the Eurozone could well splinter confidence. And in a fiercely competitive business environment where clients are increasingly demanding more for less, the pressure to convert new business and carefully plan capacity is likely to be the test for businesses in 2012.”

For their part, economists at Barclays are commenting that, “(…) Certainly, readings at these levels would not be consistent with a GDP contraction, suggesting fears of a renewed recession may have been overdone.

Even so, we do not believe the strong services PMI reading will stand in the way of more QE next week for two reasons. First, the MPC's prior inflation forecast undershoot was very large and there is not enough news in today's release to counterbalance that. Second, even if growth in Q1 is above expectations, Q4 growth was weaker than the MPC had expected so the net effect on their GDP forecast is likely to be minimal. That said, while we continue to believe the MPC will extend its asset purchase programme by £50bn to £325bn next Thursday, today's data increase the likelihood that some MPC members will not support a QE expansion.”

AB

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