Britain’s services sector moved up a gear in March, boosting George Osborne’s hopes of strong economic growth ahead of next month’s general election.
Rising order books and increased foreign investment pushed the Markit/Cips purchasing managers’ index (PMI) for the service industries, which account for about 77% of the economy, to a seven-month high.
With the economy expected to play an important role as the political parties get into their stride ahead of May 7, the acceleration in business activity plays well for the chancellor, especially as it reverses a trend in the second half of last year that saw most parts of the UK economy expand at a more anaemic pace.
Figures for the construction and manufacturing sectors have shown growth slowing since last summer as businesses reacted to the faltering housing market and stagnating exports. At the same time, services firms reined in investment plans while the Greek crisis dragged the eurozone, Britain’s biggest export destination, further into a political quagmire that was only alleviated by the European Central Bank’s €1.1 trillion stimulus plan.
The trend for slower growth continued into the post-Christmas period until the fall in oil prices fed through into lower costs for businesses and a much needed windfall for consumers.
The PMI survey figure of 58.9, up from 56.7 the previous month, comfortably beat City expectations of 57 and increased the likelihood that the chancellor will go to the polls with the UK as one of the world’s fastest-growing major economies. Readings above 50 signal growth of activity compared with the previous month.
But there was a warning from some analysts that the figures show Britain is continuing to rely on consumer spending to boost growth while business investment, worker productivity and export growth remain lacklustre.
Chris Williamson, chief economist at Markit, said surveys covering the services, construction and manufacturing sectors indicate that the economy grew by 0.7% in the first quarter, reversing a slowdown seen late last year.
“The combination of fuller employment and falling prices should support economic growth by providing an important catalyst to higher consumer spending, on which the upturn appears to have become increasingly dependent in recent months,” he said.
The survey data showed employment growth remaining close to record highs and that inflation showed few signs of picking up from its all-time low, he added. Though companies complained that skills shortages were becoming a bigger problem and could soon put a brake on growth.
Martin Beck, senior economic advisor to the EY ITEM Club, said a strong pipeline of new business contrasted with price-cutting to win business to give the Bank of England’s monetary policy committee food for thought.
“For the [hawks on the committee], services activity and employment continues to rise at a strong rate, while there is evidence of rising wage pressures in the sector. But for those more inclined to wait and see before hiking rates, March’s services survey also offered support, showing growth in input costs remaining historically muted and output prices rising only fractionally.”
He added: “And with a healthy cocktail of low borrowing costs and rising real incomes, prospects for the services sector and the wider economy continue to look very bright.”
