Services Sector Expands At Its Fastest Rate In Over A Year

The PMI data show that the services sector has expanded in every month of 2013 to date. As it makes up roughly three quarters of the total UK economy, these latest results are encouraging news and suggest that the UK economy may be able to build on the 0.3% growth seen in Q1.

Underpinning the increase in services sector activity was a combination of higher sales volumes, promotional activities and new product launches. A number of companies also reported that better weather had supported growth, helping to drive the sharpest rate of new business growth since February 2010, although improved market conditions were also widely mentioned.

Today’s figures come after PMI data for manufacturing and construction, also released this week, showed signs of improvement in the economic prospects of these sectors. The May PMI for the construction sector pointed to expansion for the first time since October 2012, while the manufacturing sector showed two consecutive months of expanding output. One of the weaknesses of the economy in Q1 2013 was that growth was almost entirely driven by the services sector. So these tentative signs of improvement in other sectors are welcome news.

The PMI data – along with other measures such as business and consumer confidence – suggest that the UK economic recovery is gaining a stronger foothold, increasing the likelihood of economic growth reaching or breaching the 1% mark this year.

Having said that, questions should be asked about the sustainability of this recovery. The Chancellor has effectively given up on substantial deficit reduction in the short-term, meaning that deep spending cuts loom further down the road. This will hold back medium-term growth prospects. The UK also remains too reliant on consumer spending and has yet to increase the role of exports and business investment in driving the economy; these two components of growth actually contracted in real terms in the first quarter of 2013. Overall, the latest data are cause for optimism, but underlying weaknesses should remain a concern.