U.K. Services Growth Accelerates as Demand Strengthens: Economy

U.K. services unexpectedly accelerated last month as demand strengthened, indicating the economy may stave off a recession this quarter.

A gauge of activity increased to 51.8 from 51.5 in January, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. The pound rose after the survey. A separate report showed that euro-area services shrank less than initially estimated last month.

Bank of England policy makers begin their monthly meeting tomorrow after they split on the need to expand quantitative easing in February. While a slump in a manufacturing gauge last week raised concerns the economy may succumb to a triple-dip recession, Markit said its indexes now point to 0.1 percent expansion this quarter.

“This release is not strong enough to take the prospect of more QE on Thursday off the table, but it certainly muddies the waters somewhat,” said David Tinsley, an economist at BNP Paribas SA in London and a former BOE official. “Overall, there remain arguments for doing more.”

Economists had forecast that the U.K. index would drop to 51, according to the median of 29 estimates in a Bloomberg News survey. A reading above 50 indicates expansion. The pound extended its gain against the dollar after the report and was trading at $1.5148 as of 10:52 a.m. in London, up 0.2 percent from yesterday.

U.S. Expansion

U.S. services probably maintained expansion last month, economists said before a report today. The Institute for Supply Management’s February non-manufacturing index, which covers almost 90 percent of the economy, was 55 compared with 55.2 the prior month, according to the median estimate in a survey.

In the U.K., optimism among services companies rose in February even as input-price inflation accelerated to a 14-month high, Markit said. New business increased at the sharpest pace for nine months, while employment also rose.

“This modest underlying improvement suggests we might be heading in the right direction at last,” CIPS Chief Executive Officer David Noble said in the statement. “Whether this trajectory can be maintained, however, is another question entirely, given other sectors have not performed as well.”

Markit’s gauge of U.K. factory activity plunged to 47.9 in February from a revised 50.5 in January, it said on March 1. A construction measure also declined. The U.K. economy contracted 0.3 in the fourth quarter.

Markit Chief Economist Chris Williamson said first-quarter growth could be stronger than currently forecast because some of the manufacturing and construction weakness was due to weather disruption, and a “brighter picture may emerge in March.”

BOE Decision

Still, with Britain’s recovery unable to gain momentum, BOE policy makers are setting aside inflation concerns and discussing new measures to help the economy.

The MPC will leave its target for bond purchases at 375 billion pounds ($568 billion) on Thursday, according to the median of 39 estimates in a Bloomberg News survey. Eleven banks are predicting an expansion of stimulus, including Citigroup Inc., ING Bank NV and BNP Paribas.

While today’s report weighs against the expansion of stimulus this week, Markit’s weighted average of its surveys suggest it’s still “touch and go whether the overall economy will manage to grow at all this quarter,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official.

“A triple-dip recession is certainly still very possible,” she said. ‘Unless the economic data show a marked improvement, we will probably see a resumption of QE before long.’’

Euro-Area Economy

In the euro region, a services gauge fell less than initially estimated in February. The index declined to 47.9 from 48.6 in January. That compares with an initial estimate of of 47.3 on Feb. 21. A composite gauge of euro-area services and manufacturing output fell to 47.9 from 48.6.

China’s services industries expanded at the slowest pace since September as a gauge of new orders declined. The non- manufacturing Purchasing Managers’ Index fell to 54.5 from 56.2 in January, the Beijing-based National Bureau of Statistics said. A separate gauge from HSBC Holdings Plc and Markit declined to 52.1 from 54.

Chinese Premier Wen Jiabao said today that the nation lacks a sustainable growth model and faces mounting “social problems.” Speaking in his final report to the National People’s Congress in Beijing as he ends a decade in power, Wen set an economic growth target of 7.5 percent for this year, the same as in 2012, and an inflation goal of 3.5 percent.

Elsewhere today, the Reserve Bank of Australia kept its benchmark interest rate unchanged at a half-century low and reiterated it has room to cut further if needed to boost demand.

“With inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate,” Governor Glenn Steven said in a statement. “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.