Economy showing signs of a recovery – survey

Jun 4 2009 by Peter McCusker, The Journal

THE strongest sign yet that the UK economy could begin its recovery before the end of the year was emerged when the key services sector showed growth for the first time in a year.

The Chartered Institute of Purchasing and Supply’s (CIPS) services survey showed an activity index reading of 51.7 in May – the first time the beleaguered sector has pulled into positive territory since April last year.

The return to growth for the powerhouse sector – which makes up around 70% of the economy – has given a major boost to hopes for stabilisation in the UK economy, according to economists. The index’s rise above the crucial 50 mark – with a score above that level signalling growth – took economists by surprise. James Knightley, of Capital Economics, said the reading, taken with other recent positive survey evidence, suggested it was “increasingly possible” that the UK could see positive economic growth in the third quarter of this year.

“This would be a remarkable turnaround for the UK economy and suggests sterling’s rally has further to run,” he said.

“Nonetheless, there are ongoing headwinds – de-leveraging, higher savings, less credit availability, higher taxes and lower government spending – which will mean the recovery will likely be characterised as mild rather than vigorous,” he added.

CIPS said continued discounting in the services sector supported sales, while business confidence rose to its highest level in over a year-and-a-half. The service sector has suffered unprecedented declines in the last year as consumer and business spending dissolved in the recession, while credit difficulties caused by the banking crisis and the stagnation of the housing market have added to companies’ woes.

May’s increase in activity reflected a similar gain in new business over the month, for the first time in over a year.