Carney to take over with ‘all cylinders firing’ in economy

Canadian Mark Carney replaces Mervyn King as Governor of the Bank of England next month as hopes rise that Britain is finally on the road to recovery.

New figures show the dominant service sector grew much faster than expected in May, underpinned by the sharpest rate of new business growth in more than three years.

The Purchasing Managers’ Index (PMI) for services rose to 54.9 in May from 52.9 in April, its strongest reading since March 2012 and easily beating forecasts.

The latest in a positive run of data, the figures are strong evidence the British economy will grow in the second quarter, and that it is on the mend after two years of stagnation.

Sterling rose against the dollar and government bond futures briefly fell on the news, as the data reinforced expectations that the Bank of England will refrain from further asset buying with newly minted money to stimulate the economy.

The news will be a relief for Chancellor George Osborne, who has faced criticism at home and from the International Monetary Fund for a harsh austerity programme aimed at reducing Britain’s hefty deficit.

“The UK economy has moved up a gear, with all cylinders now firing,” said Chris Williamson, economist at survey compiler Markit.

“The increasingly buoyant picture and improved outlook painted by the PMIs effectively kills off any chance of the Bank of England’s Monetary Policy Committee voting for more stimulus such as asset purchases for the foreseeable future.”

Services make up more than three quarters of the British economy. Although yesterday’s figures do not cover retailers or the public sector, when combined with this week’s manufacturing and construction surveys they point to possible GDP growth of 0.5 per cent in the second three months of the year, said Markit.

Britain’s economy grew 0.3 per cent in the first three months of 2013.

The arrival of better weather in May boosted new business numbers, Markit said, after an unusually cold March and April which many companies have cited as a factor in weak earnings.

The composite index, which also incorporates Monday’s manufacturing and Tuesday’s construction surveys, rose to 54.3 in May, the highest since March 2012, after all produced positive readings.

But others sounded a more cautious note. Tom Vosa, chief economist at Yorkshire Bank, said the strength of the PMIs could be borrowed from the second half of the year. He also raised concerns that the fundamentals for UK economic activity have yet to change.

“Real incomes are still falling due to higher inflation and stagnant wages and large corporations, which account for the bulk of business investment, still seem more concerned to build up cash balanced than invest in plant and equipment,” he said.

Mr Vosa said the Yorkshire economy is “probably... slightly underperforming” because the improvement in manufacturing in May comes after a weaker April.

He added that the improvement in construction is being felt largely in London and the South East and in residential housebuilding rather than civil engineering and infrastructure work.

“The recovery in construction is a London-centric story,” said Mr Vosa. In Yorkshire, he said real incomes are still squeezed and the region has yet to feel the full impact from Government changes to welfare payments.

“The private sector, for what it’s worth, is not yet strong enough to provide a full offset for all that,” added Mr Vosa.

The Bank of England resumes its June policy meeting today to decide whether to boost the economy with further quantitative easing. The meeting will be Mervyn King’s last before he is replaced by Mr Carney on July 1.

“New Governor Mark Carney will have the benefit of taking the reins of an economy that is already showing signs of acquiring ‘escape velocity’ from the doldrums it has been wallowing in for much of the last two years,” said Chris Williamson of Markit.

However, prospects for a strong recovery may still hinge on a return to growth in the eurozone, its biggest trading partner.

Eurozone surveys yesterday were slightly more upbeat in tone than last month’s, but suggested the bloc’s recession will continue through the current quarter.

Former Goldman Sachs banker Mr Carney left his post as Governor of the Bank of Canada after five-and-a-half years on June 1.

Chancellor George Osborne has described him as “the best, most experienced and most qualified person” for the job.