U.K. Services Growth Quickens to Fastest in 14 Months

U.K. services growth accelerated more than economists forecast last month as signs mount that the recovery may strengthen, adding to the case for Bank of England policy makers to refrain from further stimulus.

A gauge of activity rose to 54.9, the highest in 14 months, from 52.9 in April, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. Economists had forecast 53.1, according to the median of 33 estimates in a Bloomberg News survey. Readings above 50 indicate expansion. The pound advanced.

Britain’s economy may be gaining traction after Markit’s reports this week on manufacturing and construction both showed growth. Bank of England officials start their two-day policy meeting today, and economists predict that they will probably keep their quantitative-easing target on hold. The meeting is the last for Governor Mervyn King before he retires and is succeeded by Mark Carney of the Bank of Canada.

The industry surveys “bode well for economic activity in the months ahead,” said James Knightley, an economist at ING Bank in London. “As such, there is little prospect of any BOE action tomorrow and it diminishes the likelihood of any shift in policy under Mark Carney in the next few months.”

The pound extended its advance against the dollar after the index. It was trading at $1.5351 as of 11.23 a.m. London time, up 0.3 percent from yesterday. Sterling strengthened to a two-week high against the euro.

Growth Accelerating

New business growth at services companies rose at the fastest pace since February 2010, while payrolls also increased, according to today’s report.

Markit said its three industry indexes indicate economic growth may accelerate to 0.5 percent this quarter from 0.3 percent in the first three months of the year. That would match a forecast published by the BOE last month.

“The U.K. economy has moved up a gear with all cylinders now firing,” said Chris Williamson, chief economist at Markit in London. “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.”

The U.K. data contrast with the picture in the euro area, where efforts by authorities to calm the currency bloc’s debt crisis have yet to translate into an economic recovery.

Retail Sales

Markit said its index of euro-region services activity rose to 47.2 last month from 47 in April, below an initial estimate of 47.5 published on May 23. Retail sales dropped 0.5 percent in April from March, the European Union statistics office said. Economists had forecast a 0.2 percent decline, according to the median of 22 estimates in a Bloomberg News survey. From a year earlier, sales were down 1.1 percent.

Separate data showed the euro economy shrank 0.2 percent in the first quarter, confirming an initial estimate. Investment as measured by gross fixed capital formation dropped 1.6 percent, subtracting 0.3 percentage points from GDP. Government spending and exports also fell, while consumer spending rose 0.1 percent.

Elsewhere today, a services index in Russia fell to 51.4 in May from 53 in April. An index for China by HSBC Holdings Plc and Markit rose to 51.2 from 51.1. A U.S. services index probably rose to 53.5 from 53.1, economists said before a report from the Institute for Supply Management later today.

Australian GDP

Australia’s economy expanded at the slowest annual pace in almost two years as manufacturers and builders detracted from growth, sending the nation’s currency lower as traders increased bets on further interest-rate cuts.

Gross domestic product expanded 2.5 percent in the first quarter from a year earlier, the weakest reading since the second quarter of 2011. Economists predicted a 2.7 percent gain.

In the U.K., King said in an interview broadcast June 2 that “the economy is growing,” though “not as fast as we would like it to grow.”

London-based Lloyds Banking Group Plc said May 16 it will return to profitability in 2013, allowing the government to start selling its stake. Lloyds, which ceded a 39 percent stake to the U.K. state after its 20 billion-pound ($31 billion) bailout in 2008, posted an almost threefold increase in first-quarter profit as impairments for souring loans dropped.

The BOE will probably hold its bond-purchase plan at 375 billion pounds, according to the median of 43 estimates in a Bloomberg survey. It will also keep the benchmark interest rate at a record low of 0.5 percent, according to all 53 economists in a separate poll. The bank will announce the decisions at noon in London tomorrow.

“The latest data are cause for optimism, but underlying weaknesses should remain a concern,” Scott Corfe, senior economist at the Centre for Economics and Business Research in London, said in an e-mailed note. Amid the fiscal squeeze, “questions should be asked about the sustainability of this recovery.”

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