Recession Avoided? Service Sector Data Suggests UK Economy on the Mend

Britain's services sector is growing at its fastest pace for two years, according to purchasing managers index (PMI) data released by economic research company Markit

The index figure for the services sector, which includes retail and banking and accounts for around three quarters of the UK's GDP, leapt to 55.3 in March from 53.8 in the previous month.

"Faster growth of services activity in March indicates that the economy is on the up again, skirting recession as business continues to bounce back from the lull seen late last year," Chris Williamson, chief economist at Markit, said.

Sterling hit a two-week high against the euro, which fell to 82.90 pence, after the better-than-expected services PMI data.

There was little change on the FTSE 250, the broadest measure of UK stock performance, which was down by 1.12 percent at 10:00am London-time.

Services PMI data follows on from two days of positive PMI data in the construction and manufacturing sectors, indicating that the UK economy may avoid slumping into another recession and start growing again.

"This morning's UK services figure was a welcome surprise and should quell fears that UK growth is fizzling out after a strong start to 2012," Richard Driver, analyst for Caxton FX, said.

"The recent figures out of the UK construction and manufacturing sectors were genuinely impressive and suggest there is a bit more momentum in British industry than has been indicated in recent weeks."

Construction activity is on the rise and saw the sharpest increase in its PMI figure for 21 months, from February's 54.3 to January's 56.7.

It was boosted by good weather across the two months, with March seeing its warmest temperatures for 50 years.

There was also a substantial rise in new business and a modest rise in employment.

Confidence also peaked at a 22-month high as construction businesses start to feel more positive about their outlook for the future.

"The particularly encouraging news is that the improvement in confidence is generating more jobs, with employment rising modestly," Chris Williamson, chief economist at Markit, said.

Over in the UK's manufacturing sector activity hit a 10-month high, with a rise in its PMI figure from 51.5 in February to 52.1 in March.

This is the highest manufacturing PMI figure in the whole of Europe for the month.

"UK manufacturing has made a brighter than expected start to 2012, with PMI data pointing to output growth of around 0.3% in the first quarter," Rob Dobson, senior economist at Markit, said.

"This is obviously nowhere near a strong pace, but it is at least sufficient to prevent the sector from remaining a drag on broader GDP growth."

Economists Think BoE Will Hold-Off of QE After Good Data

With the latest economic data for the UK pointing to recovery not recession, after a downward revision of GDP figures by the Office for National Statistics (ONS) for 2011's Q4 to a 0.3 percent contraction rather than 0.2 sent jitters down some spines, economists are predicting that the Bank of England will hold off from more monetary stimulus.

The Bank is pursuing its "asset purchase facility" programme, also known as quantitative easing, which sees it buy up high quality assets such as gilts in order to improve liquidity in the markets.

A Reuters poll of 56 economists showed they think the Bank will leave its £325bn target for the programme unchanged when its rate-setting Monetary Policy Committee meets on 5 April, having increased it twice before.

In February the Bank announced a £50bn increase in its quantitative easing programme, after adding £75bn to its target in October.

As inflation falls sharply, from its 5.2 percent peak in September to February's 3.4 percent, and is expected to fall below the government's 2 percent target by the end of the year, some argue that the Bank has room to inject more monetary stimulus to try and get the UK economy moving again after a period of flat growth.

However with signs that the economy is starting to recover there will be questions over if there is now any need to expand the programme at all.