HOPES that the UK economy dodged renewed recession in the first quarter have been fuelled by a closely watched survey which signals an acceleration of growth in the dominant services sector in March.
The Organisation for Economic Cooperation and Development had predicted that the UK economy, which is struggling amid swingeing public sector spending cuts, would contract by a further 0.1% in the opening three months of this year. UK gross domestic product fell by 0.3% in the final three months of last year, and dropped in three of the five quarters to the end of 2011.
However, economists predicted yesterday that the UK would have achieved modest growth in the opening three months of this year, as a survey from the Chartered Institute of Purchasing and Supply and financial information company Markit showed an unexpected acceleration of service sector expansion last month.
This services survey does not include retail. Other surveys and official data signalled retailers had a tough first quarter.
CIPS' business activity index for services jumped from 53.8 in February to 55.3 in March on a seasonally adjusted basis, rising further above the level of 50 which separates expansion from contraction. The City had predicted a reading of 53.4.
CIPS' survey showed a pick-up in the rate of increase in employment in services, albeit this remained muted, and an acceleration in growth of new business for companies in the sector.
Howard Archer, chief UK economist at consultancy IHS Global Insight, predicts the UK economy will have grown by 0.3% in the opening three months of this year. While this would mean the economy had flatlined over the six months to March 31, such an outcome for the first three months of 2012 would see the UK avoid a second consecutive quarter of contraction and thus dodge renewed recession.
The service sector report follows surveys from CIPS earlier this week showing an acceleration in growth of the UK manufacturing and construction sectors during March.
Mr Archer said: "This is very good news that adds to the signs that the UK economy picked up in March. It also contrasts with the largely poor eurozone surveys. Given the dominant role of the services sector in the economy, the relatively upbeat purchasing managers' survey for March provides a major lift to hopes that the economy saw clear growth in the first quarter.
"Furthermore, it follows on from improved manufacturing and, especially, construction surveys so the signs are that the economy picked up generally during March."
He added: "We currently estimate GDP growth at around 0.3% quarter-on-quarter in the first quarter, and the improved purchasing managers' surveys mean that there is a chance that this could be on the pessimistic side.
"At the very least, the OECD's estimate that the UK economy contracted by around 0.1% quarter-on-quarter in the first quarter, so moving into recession, looks ever more highly doubtful."
However, Mr Archer highlighted pressures on consumers amid public spending cuts and higher taxes. And he warned that it "remains highly likely that UK economic activity will remain limited overall and prone to relapses in the near term at least".
He added: "The UK is not yet out of the economic woods, and dangers continue to lurk in the form of still-squeezed consumers, tight fiscal policy, and still serious problems in the eurozone.
"Meanwhile, current elevated oil prices are a serious concern to growth prospects as they are squeezing companies' margins, and risk limiting the retreat in consumer price inflation which is key to boosting consumers' purchasing power."
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