Economists say services sector data points to continued growth in British economy

Another strong set of Purchasing Managers' Index (PMI) figures for the services sector released Wednesday indicates that the British economy looks set to grow robustly in the first quarter of 2014, economists said. Economic activity appears to have slowed slightly, and the services sector, which accounts for 77 percent of the British economy, recorded a PMI of 58.3, down from 58.8 in December and a consensus forecast of 59. The January PMI figures for the composite output index for services, manufacturing and construction eased back to a seven-month low of 58.9 in January from 59.2 in December and a record high of 61.8 in October. January's fall was the third in succession but it still remains at a high level (above 50 is growth). James Knightley, British economist with ING Bank, said, "It remains well above the break-even 50 level with the survey compiler suggesting that the composite index of services, manufacturing and construction is at levels consistent with the economy growing by around 0.8 percent quarter on quarter in the current quarter." Knightley said that the wettest January on record may have dented activity. "Businesses remain optimistic with the services expectations component rising to its highest level since March 2010; this offers hope that investment spending will pick up through the year and that employment will continue to grow with the numbers remaining consistent with our view that the UK economy will grow by around 3 percent this year," he said. Expectations for future activity are very strong, and service sector growth is likely to remain solid during H1 2014, said Simon Wells, chief economist with HSBC Global Research. He said "The picture is similar to the January manufacturing PMI, in that the index fell further from its highs but remained at a high level. Combining these with the very strong construction PMI suggests the economy got off to a good start in January. The PMIs alone would point to a slightly higher Q1 growth rate than our current forecast of 0.6 percent quarter on quarter." Howard Archer, chief British and European economist with IHS Global Insight, said it was "a very strong report overall" showing healthy expansion, healthy incoming business, markedly rising employment and confidence in the sector at a near four-year high. Employment in the sector rose for the 13th month running in January and at the second fastest rate after October since December 2006. Archer said this was likely to fuel market expectations that the unemployment rate will get down to 7 percent imminently, and maintain market suspicions that the central bank, the Bank of England (BOE) could start raising interest rates before the end of 2014. "Higher input and output prices in January may also fuel suspicion that interest rates could rise later in 2014," he said. However, Archer said the slight easing back of growth reinforced the conviction that the BOE would keep interest rates at the 0.5 percent historical low throughout 2014 and possibly well into 2015. Archer said, "We anticipate that the Bank of England will want to give the economy as much chance as possible to establish broad-based growth and will hold off from raising interest rates for some considerable time to come despite current sharply falling unemployment assuming that there are no nasty inflation shocks." Wells said the main issue for the MPC is whether the increase in backlogs, rises in prices and strong employment intentions is signalling a lack of spare capacity. "The MPC must decide if there will be a cyclical recovery in productivity mitigating some of these capacity pressures or whether to put a lot of weight on the surveys," Wells said. "The uncertainty about the amount of slack suggests that the MPC should return to a more flexible form of monetary policy rather than renew forward guidance linked to a single variable. That policy appears to have done its job." He added.