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Surging services sector brightens economic outlook

PUBLISHED: 12:54 06 May 2015 | UPDATED: 12:54 06 May 2015

Waiter. Food services. Picture submitted

Waiter. Food services. Picture submitted

(c) Push

Britain's dominant services sector grew at its fastest pace in eight months in April, lifting hopes of a bounce-back for the wider economy after a slow start to the year.

The sector posted a reading of 59.5 on the closely watched CIPS/Markit purchasing managers’ index (PMI) survey, in which 50 separates growth from contraction. It was the highest level since August and up from 58.9 in March.

Together with other industry surveys it pointed to the economy returning to form in the second quarter, indicating expansion at a rate of 0.8% after a sharp slowdown in gross domestic product (GDP) growth in the first three months of 2015 to 0.3%.

But despite the numbers - seen as a boost for coalition parties - there were “warning lights about the sustainability of growth” after the survey data from manufacturing and construction were weaker.

The services sector represents more than three-quarters of economic output and has led the UK to surpass its pre-recession size while other parts of the economy still lag behind where they were in 2008.

Today’s services data showed a marked rise in new business amid improving economic confidence and warm weather. There was strong employment growth and sentiment was “elevated” though slipping slightly from March on pre-election uncertainty.

However there was pressure on profit margins as firms saw output prices fall for the first time in six months as input costs continued to rise on the back of wage pressures, the survey found - likely to revive worries about deflation.

Chris Williamson, chief economist at Markit, said: “Fears of the economy slumping amid election jitters are allayed as an upturn in service sector activity has helped offset sharp slowdowns in both manufacturing and construction.

“It looks like the economy has rebounded from weakness seen at the start of the new year. But there are warning lights flashing about the sustainability of growth.

“Rather than rebalancing towards manufacturing, economic growth has become increasingly reliant on the service sector.”

Vicky Redwood, chief UK economist at Capital Economics, said: “It does not look as though uncertainty about the General Election’s result has knocked the economic recovery off course.

“That said, the recovery is clearly not very well-balanced across different parts of the economy, with growth still heavily reliant on the consumer and services sectors.”

Howard Archer of IHS Global Insight said it was “late and welcome good news on the economy ahead of the election for the Conservatives and Liberal Democrats”.

“This will be a relief to them after a recent flurry of softer news on the economy.”

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