Services sector records small growth increase

The economy is showing signs that it is near to the trough of the recession as data on Wednesday suggested the services sector grew marginally in April for the first time since last summer.

The purchasing managers’ index for services, which tracks business activity in private sector services companies apart from retail and distribution, rose from 45.5 last month to 48.7 – its highest level since last August.

Any level above 47 has previously tallied with real growth in the service industries that the survey tracks, according to Markit Economics, the polling company which compiles the data.

The index rose for the fifth month in a row and follows strong rises in business surveys for the manufacturing and construction sectors, as well as relatively buoyant sales at high street shops.

“A straight comparison against similar official data indicates that the latest reading is consistent with marginal quarterly growth of the services economy,” said Paul Smith, economist at Markit.

The service sector including both retail and government services makes up about 75 per cent of the economy, so any growth in services is vital to national output levels.

Services industries have been in decline for 12 months, according to the purchasing managers’ index. In the first quarter of this year, services recorded the biggest quarterly drop in output since 1979 as gross domestic product fell 1.9 per cent.

Economists at Goldman Sachs, whose forecasts are among the more optimistic in the City, said the data on services suggested that the recession was either close to ending or had actually bottomed out in April.

Kevin Daly, an economist at Goldman, said April’s PMI readings, combined with recent data from the CBI employers’ group on retail, wholesales and motor sales, were “broadly speaking consistent with flat output” in the economy.

Many other economists, however, have been predicting that the recession will continue into 2010.

The purchasing managers’ indices for manufacturing and services show that business activity in those sectors is stronger in the UK than in the eurozone, the US and Japan. Economists put that down to a boost to UK competitiveness from the sharp fall in the value of sterling and a further sell-off of inventories by companies.

However, the outlook for jobs continues to suggest sharp cuts in services sector staffing ahead. Further job losses across the economy and still falling house prices leave a threat that any recovery will be weak.