UK is 'clawing its way out of recession'

By Philip Aldrick, Economics Editor

Activity among the UK’s banks, hauliers, accountants and other services industries that make up three-quarters of the UK economy, increased by more than expected in August and produced the strongest performance in five months.
 

The closely-watched Purchasing Managers’ Index (PMI), on which a reading above 50 implies expansion, rose from 51 in July to 53.7, against forecasts of just 51.2.
 

The surprising strength of services countered declines in both manufacturing and construction in August, delivering a welcome boost to confidence and reducing the prospect of an interest-rate cut or more money-printing by the Bank of England tomorrow .
 

Vicky Redwood, at Capital Economics, said: “A weighted average of the surveys is consistent with quarterly GDP growth of 0.1pc or so, suggesting the economy may just about be clawing its way out of recession.”
 

The services figures, released a day early after an error by Reuters, helped allay concerns raised by weak construction data released earlier in the day.
 

 
The construction PMIs fell from 50.9 in July to 49, suggesting activity in the sector shrank in August. Economists had expected a reading of 50, suggesting stagnation rather than decline.
 
Analysts said the detail raised deeper concerns about the outlook for the construction industry. New orders sinking to their lowest level since April 2009 and the businesses were more pessimistic about prospects than at any point since last October.
 
The surprise fall will also pile pressure on the Government to deliver on its promises to get infrastructure spending moving to help contractors. The Treasury has lined up £40bn of funding guarantees for companies that are willing to invest.
 
The bleak picture on construction, which accounts for 6.8pc of the total economy but has been a major factor in the downturn, was in stark contrast to the services sector.
 
“The survey as a whole had a more upbeat tone than in July,” Barclays Capital UK economist Chris Crowe said. Business expectations picked up to 66.5 from 65.6, while new orders and hiring intentions also indicated growth.
 
“The latest move seems to represent something of a normalisation in business conditions,” said Ross Walker, UK economist at Royal Bank of Scotland.
 
Mr Crowe said that, should the trend across services, construction and manufacturing continue in September, GDP would rise by 0.4pc in the third quarter. However, he said the figure was flattered by the Olympics and the unwinding of the Jubilee bank holiday effect, and that underlying growth in the UK was still negative, at -0.1pc.
 
Ms Redwood also warned that the services PMI data excluded retailers, from which recent news has been disappointing.
 
The economy crashed back into recession in the final quarter of last year and contracted by 1.2pc in the nine months to June.