Bank of England to take rock-bottom interest rate past its fifth birthday as services sector shows robust growth
- The Markit/CIPS services survey saw a headline reading of 58.2 in February
- Economists say this week's PMIs point to overall 2014 GDP growth of 2.7%
The strength of the recovery by Britain’s economy was confirmed today by data showing robust growth in the key services secor, giving Bank of England policymakers plenty to mull over at their monthly meeting.
After five years of rock-bottom rates, no change is expected yet again to the 0.5 per cent base rate by the monetary policy committee tomorrow.
Today's data showed healthy growth in the services industry despite recent appalling weather, which economists predict means the economy could expand by around 0.7 per cent in the first quarter of 2014.
Trading trends: Services industry continued to grow robustly in February
The news of robust levels of services activity followed buoyant manufacturing and construction surveys for February, and it all points to overall GDP growth of 2.7 per cent this year, according to Howard Archer of IHS Global Insight.
His forecast was backed by the EY ITEM Club, which said: 'Taking February’s three activity surveys together, we appear set for another quarter of GDP growth at around 0.7 per cent in the first quarter of 2014, which keeps us on track for growth in the region of 2.7 per cent over the year as a whole.'
Tomorrow's decision will be the first since the Bank abandoned its 'forward guidance’ pledge linking the cost of borrowing to an unemployment figure target of 7 per cent, which has already been breached.
The new version - dubbed ‘fuzzy guidance’ - will see the Bank’s decisions on interest rates based instead on how quickly the economy uses up its spare capacity.
The Bank has said it would give no timing on when interest rates would rise, although market expectations are for this to happen in the second quarter of 2015. It has also stressed that when rates rise, the increase will be gradual.
Recent comments from individual MPC members have also signaled that rates may rise next year.
There was also good news on inflation as the latest figures showed services firms were keeping the lid on costs and therefore prices - which will help the Bank of England combat calls to raise interest rates as the economy takes off again.
The pound edged higher on currency markets after the February services data confirmed that a recovery is firmly under way in the UK.
The headline reading of 58.2 in the closely-watched Markit/CIPS services survey was slightly down on the 58.3 seen in June and the lowest since June. But any figure above 50 indicates growth, so it continued to show strong overall expansion.
Services growth has been recorded for 14 months now and the latest increase in output was supported by another marked rise in new business. Confidence in the outlook also strengthened to the highest for nearly four and a half years.
The report found that adverse weather in some parts of the UK disrupted activity but that the relatively mild winter had also provided a support to growth.
EUROZONE RECOVERY GATHERS PACE
Economic expansion in the eurozone accelerated in Feburary at the fastest rate for 32 months, the latest Markit survey shows.
Hopes of recovery in the troubled region were boosted by a joint services, manufacturing and construction reading of 53.3, up from 52.9 in January.
Markit said the survey suggested the eurozone was on course to grow by 0.4-0.5 per cent in the first quarter of 2014, which would be its best performance for three years.
Meanwhile, it was confirmed that the eurozone grew 0.3 per cent in the final quarter of 2013.
'While still far from dynamic, it was a step back in the right direction after growth had slowed to just 0.1 per cent in the third quarter.' said Howard Archer of IHS Insight.
'Furthermore, it marked a third successive quarter of expansion following six quarters of contraction through to the first quarter of 2013.'
The European Central Bank will also hold its latest Council meeting tomorrow, with no change to monetary policy predicted as the eurozone walks the tightrope between modest growth and deflation prospects.
European policymakers remain under pressure to either cut interest rates again or use additional unconventional measures to fend off the threat of ultra-low inflation turning into something worse.
Businesses also increased their staffing numbers at the sharpest rate since October.
The manufacturing Markit/CIPS survey for February released earlier this week showed factories took on additional staff at the fastest rate for nearly three years. The purchasing managers' index (PMI) for the sector rose to 56.9 from 56.6 in January, beating the 56.5 expected by economists.
Britain’s construction sector saw output growth ease off last month as heavy rain and floods affected housing building. It slipped to a reading of 62.6 in February, down from 64.6 in January - which was its highest level since August 2007.
However, it remained well above 50 showing the construction sector is still expanding strongly even if it has slowed a little.
Some allowance has to be made for the very wet weather and flooding having a modest overall negative impact on economic activity in February, according to Howard Archer.
But he said the latest services survey looked healthy, especially in light of this factor.
'The services sector seems well set for another quarter of robust expansion in the first quarter of 2014, although activity has come slightly off the peak levels seen around the third quarter of 2013,' he said.
'GDP growth is likely to ease back a little to a 0.6-0.7 per cent range through 2014 compared with the 0.8 per cent quarter-on-quarter peak rate seen in the third quarter of 2013. This is seen resulting in overall GDP growth of 2.7 per cent in 2014.
'Meanwhile, there was reassuring news on the inflation front for the Bank of England with input prices in the services sector rising at the slowest rate for six months and prices charged moderating to a five-month low.
'This facilitates the Bank of England keeping interest rates down at 0.50 per cent for some time to come, thereby helping to nurture recovery.'
Markit said the upbeat services result alongside good performances in manufacturing and construction point to the UK enjoying another quarter of robust economic growth of around 0.7 per cent.
Number crunching: Services growth has now been recorded for 14 months and the latest increase in output was supported by another marked rise in new business
Markit's chief economist Chris Williamson believes the economy is set for its best year of growth since 2007, easily surpassing the 1.8 per cent seen last year.
'Most encouraging of all is the record increase in job creation that the three PMI surveys collectively signalled in February,' he said.
'There's no end in sight to the good news: with business confidence in the services economy rising further in February, growth should pick up again in March.'
The UK expanded by 0.7 per cent in the final quarter of 2013, with economists currently predicting an annual improvement of up to 3 per cent for 2014.
Andrew Goodwin senior economic adviser to the EY ITEM Club, said: 'Today’s PMI services survey provides further evidence that the UK recovery is still going strong. Although headline business activity index ticked down a touch on its level in January, it still remains well above the historical average.'
'The finer details of the services survey provide further good news, supporting the notion of a broader economic recovery. Rising backlogs and upbeat business confidence should support continued strength in business investment, which are shown to be performing particularly well in the latest national accounts.
Goodwin added: 'The strength of business sentiment is also being reflected in employment growth, which increased at a record pace in February. This is likely to translate into stronger wage growth, as companies begin to face skills shortages, fostering sustained strength in consumer spending.'
Jonathan Pryor, head of FX dealing at Investec Corporate and Institutional Treasury, said: 'Although this morning’s PMI services number was the lowest since last July and was just marginally higher than expected, it’s been received relatively well.
'It stayed afloat at impressive levels despite the risk that the recent terrible weather would dampen the outlook and the record high for the employment component was particularly encouraging.
'The significance is that it’s another series of monthly PMI numbers, along with construction and manufacturing earlier in the week, that are deep in expansionary territory thanks to continuing robust growth in the UK.
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