Economists increase confidence on sustained surge in British economy

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Economists increase confidence on sustained surge in British economy

(Xinhua) 08:27, September 05, 2013

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LONDON, Sept. 4 -- The Purchasing Managers' Index (PMI) for the services sector recorded yet more strong economic data for the British recovery, as economists Wednesday pointed to a sustained surge in the economy.

The PMI services sector figure rose to 60.5 for August, up from 60.2 in July against a consensus of 59.7 (above/below 50 marks growth/contraction).

The composite PMI figure for August, rolling in manufacturing and construction figures released earlier this week with services, rose to 60.7 from 59.5, its highest point since the series start in 1998.

Simon Hayes, of Barclays Economic Research, said the rise in all three sector PMIs in August was counter to expectations of a pull-back from the strong reading in July.

Hayes said, "The August survey also showed a surge in new orders, which rose at their fastest pace since May 1997, amid "many reports of an ongoing strengthening of market confidence", according to Markit/CIPS, and outstanding business also rose strongly."

Hayes said the composite PMI points to Q3 GDP growth of around 0.9 percent quarter on quarter.

James Knightley, senior UK economist at ING, told Xinhua on Wednesday afternoon, "The figures are phenomenally strong; new orders are at record levels, production is up as well. It's all looking pretty good for the Britain, and when you combine it with the manufacturing and construction surveys it does paint the picture of a very robust British business/corporate sector Q3 for 2013."

Knightley said charts relating business surveys with GDP growth showed that the figures released this week were consistent with growth of around 1.2 percent quarter on quarter.

"This is a marked acceleration from the 0.7 percent we saw in the second quarter. It does argue that the Bank of England (BOE) suggesting rate hikes not happening for another three years just look wide of the mark," said Knightley.

QUESTION MARK OVER JOBS

Hayes said that the surge in output and orders was not matched by stronger recruitment.

Hayes said the survey showed the pace of hiring had fallen despite the increased optimism revealed in the figures, with the employment index dropping to 50.6 from 53.6 in July.

"This lends credence to the view that over-staffing means the economy can grow rapidly without the need for firms to hire many more workers," said Hayes.

He added, "Such an assessment underpins the BOE MPC's guidance that the unemployment rate could take several years to fall to its 7 percent threshold for considering a rise in Bank Rate."

John Zhu, British economist with HSBC, said the strong economic data was welcome.

However, the British economy is still about 3 percent smaller than it was before the global financial crisis began in 2008.

The prolonged recovery from the recession is unusual and is matched by lower unemployment rates than might be expected, as businesses have sought to keep staff or move them on to shorter hours.

As a consequence, any recovery may see productivity and employment rate improvements that are not matched by a fall in joblessness.

This is now a key British economic target after central bank governor Mark Carney chose 7 percent unemployment as the milestone at which the current historic low interest rate of 0.5 percent will be reviewed. Unemployment is currently 7.8 percent.

Zhu said "Another strong UK data release: August PMI services beat expectations, with new orders and backlogs of work rising rapidly. However, employment was little changed. The risk is that the services sector starts to run closer to full capacity, putting pressure on prices and wages."

Knightley said the main concern for the BOE would be if wages started to rise.

He said, "At the moment employment is going up but wages are not. Wages are still failing to keep pace with the cost of living, so households are still being squeezed financially."

"If we start to see those wages tick higher, then that is when the BOE is going to become more concerned because they will feel that they are starting to see a more robust economy where employees are able to push through pay rises more easily," said Knightley.

"This means in a growing environment that businesses are going to find it easier to pass on higher costs and so you get back to the old story of a wage-price spiral and that is something that Carney will want to cut off very quickly indeed," he added.

Forecasts by the BOE for two years from now are for 2 percent inflation, but the figure is currently at 2.9 percent, said Knightley.

Knightley said, "As the economy accelerates, employment is rising and that suggests inflation could well miss the 2 percent target."

Knightley said he was predicting an interest rate rise in the early part of 2015, rather than the second half of 2016 as the BOE is planning.