Services sector bounce underpins UK growth in first quarter

The UK's key services sector reported better trading than expected last month, though economists were not united over whether it would be enough to prop up the wider economic growth figures for the first quarter of the year.

February's CIPS IHS Markit services purchasing managers' index climbed to 54.5 from 53.0 the month before, beating forecasts for a slight improvement to 53.3.

Service growth thereby overtook manufacturing as the fastest growing part of the economy for only the second time since the Brexit referendum in 2016.

After a slight manufacturing slowdown and still-lacklustre construction reported last week, the Markit's all-sector PMI output index bounced back from January's 18-month low of 53.1 to 54.2 in February, which indicates UK gross domestic product growth of 0.3-0.4% for the first quarter.

While job creation was up, in services input and output prices balances to their lowest levels since August 2016 and July 2017

New business levels in the services sector picked up for the second month running to reach the strongest level since last May. .

Confidence in the sector about the coming 12 months was slightly diminished from the month before, but still better than in the second half last year.

Within the services industry, the strongest expansion in recent months was recorded in the financial services sector, while the weakest performance has been seen in hotels, restaurants and catering, followed by computing and IT services.

"These lagging sectors have reported signs of customer spending having been hit by rising prices and intensifying business uncertainty," said Chris Williamson, Markit's chief business economist.

He said it was the best level of services services activity in four months and felt the recent surveys indicated "the economy as a whole picked up some momentum" in the first two months of 2018.

Not so, said economist Sam Tombs at Pantheon Macroeconomics, as the weighted average of the UK PMIs in Q1 so far points to GDP growth slowing to 0.3% -- one-tenth below the forecast from the Bank of England's Monetary Policy Committee -- from 0.4% in Q4, despite the rise in this services PMI.

"The case for the MPC to hold back from raising interest rates in May remains strong, despite the rise in the business activity index in February. Both the activity and orders indices only are in line with their 2017 averages," he said.

He added that the decline in services input and output prices "suggests that domestically-generated inflation remains subdued and supports our view that CPI inflation will undershoot the MPC’s expectations over the coming months. The Committee might feel it has invested too much reputational capital to hold back from raising rates in May, but the data won’t support a series of hikes this year."

Paul Hollingsworth at Capital Economics pointed out that the PMI survey was conducted between 12 and 26 February, and so won’t have taken into account any disruption related to the severe weather conditions over the past week. "However, much of the lost output should be recouped in March, helping to mitigate the negative impact on Q1 GDP," he said.

"And industrial production is still likely to receive a boost from the unwinding of the drag from the closure of the Forties oil pipeline. Looking further ahead, the bigger driver of growth this year is likely to be the easing of the real pay squeeze, which should put household spending on a stronger footing. As a result, we are sticking to our above-consensus GDP growth forecast of around 2% this year."