Growth in services sector eases fears of a double dip

The rebound provides some relief to the government – under pressure again to ease its austerity drive – as well as food for thought for the Bank of England as it considers whether to pump more money into the fragile economy.

The central bank is still widely expected to announce another round of quantitative easing asset purchases next week, though the policymakers may now lean towards a smaller boost. The Markit/CIPS Purchasing Managers’ Index (PMI) for services rose to 56.0 from 54.0 in December, confounding forecasts for a dip and climbing higher above the 50 mark which separates growth from contraction.

“Given all the concerns about the weakness of activity in Q4, the prospect of a double-dip recession, I think those fears now appear to be dispelled to a large extent,” said Commerzbank economist Peter Dixon.

The improvement in services follows PMI releases showing that manufacturing unexpectedly returned to growth last month, while construction firms became more upbeat despite a slower expansion in activity. British government bonds, often seen as a safer bet by investors during poor economic conditions, tumbled into negative territory after the PMI release, heavily underperforming German debt.

Britain’s economy shrank in the final quarter of 2011, as manufacturers and construction firms scaled back production.

A contraction in the first three months of this year would tip it back into recession after weak recovery from a steep 2008-2009 slump following the financial crisis, with unemployment now at a 17-year high.

Telecommunications services group BT posted solid third-quarter core earnings yesterday despite a tough environment and falling revenue as it cut costs.

Insolvency data yesterday showed that the number of firms that went bust in England and Wales rose 7.2 per cent to 4,260 last quarter, reaching the highest level in two years. A leading British thinktank forecast on Friday that the economy had entered a mild recession and would shrink this year, urging the government to boost near-term spending to prevent long-term damage from high unemployment.

However, Chancellor George Osborne has so far firmly rejected all calls for a fiscal softening, aimed at erasing the huge budget deficit over the next five years.

The PMI survey showed business expectations made the biggest monthly jump since records began in 1996 – rising to 70.3 from 63.5 – to stand at the highest level since May. Moreover, employment in the sector expanded at the fastest rate in almost four years, fuelled by an inflow of new business and expectations of further growth.