Service sector results halt run of bad economic news

The Markit/CIPS survey for overall services activity, in which a reading above 50 represents growth, came in at 53.3 in May, unchanged from April and its 17th month of growth in a row.

The healthy figure follows data revealing a deeper-than-previously-estimated recession, a plunge in manufacturing activity and the worst retail sales in nearly two-and-a-half years.

The services sector, which makes up around 75 per cent of the total economy, was boosted by a rise in incoming new business, which hit a four-month peak, driven by increased marketing, Markit said.

The survey was seen as a key factor in yesterday’s decision by Bank of England policymakers to withhold new stimulus measures for the UK economy.

The economy shrank by 0.3 per cent in the first three months of the year, meaning the UK is in technical recession – defined as two quarters of decline in a row – following a 0.2 per cent fall in the final quarter of 2011.

The latest Markit/CIPS survey on the manufacturing sector, published last Friday, revealed a sudden and sharp turn for the worse in May.

The sector suffered its second-steepest fall in the survey’s 20-year history and came as new orders dropped at the fastest pace since March 2009.

But yesterday’s services result, combined with a decent construction sector report published on Wednesday, should restore some confidence in the overall recovery.

Markit said service sales volumes were in part supported by a reduction in output charges in May as clients pushed for discounts and competition for new business remained fierce.

Despite the fall in charges, pressure on margins was partly alleviated by a marked slowdown in average input costs, Markit said.

And given the positive trend in incoming new business, service providers added to their staffing levels during May.

Looking ahead, businesses remained positive but confidence weakened to its lowest level since last December due to fears over public sector spending cuts and the impact of the eurozone debt crisis.

Paul Smith, senior economist at Markit, said: “Although we remain convinced that the GDP figures are overstating the extent of the downturn – and this is borne out by the surveys and labour market data – it’s hard to get away from the fact that the UK economy remains relatively fragile.”