UK service sector growth 'fastest for two years'

Chefs The service sector accounts for about three-quarters of the UK's economic output

The UK's services sector, which accounts for about 75% of the economy, grew at its fastest rate for more than two years in June, a survey suggests.

The Markit/CIPS Services Purchasing Managers' Index (PMI) for the UK rose to 56.9 in June, from 54.9 in May. A figure above 50 indicates growth.

The survey adds to signs that the economic recovery is strengthening.

Markit says it expects the UK economy to grow by at least 0.5% in the second quarter of 2013.

"New orders and job creation across all sectors are now rising at the fastest rates for almost six years, lad by the vast services economy, boding well for robust growth momentum to be sustained as we move into the second half of the year," said Markit's Chris Williamson.

The figures follow encouraging news on the UK economy earlier in the week. On Monday, the PMI survey for the UK manufacturing sector showed the strongest growth in two years in June.

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What people really want to know is are we finally seeing the 'proper' recovery we've been waiting for. Right now, I'm afraid the answer to that question is no ”

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A survey released by the British Chambers of Commerce (BCC) on Tuesday suggested that business confidence in the UK is at its highest level since 2007.

'Good run'

David Tinsley, UK economist at BNP Paribas, called the service sector figures "very impressive".

"All told yet again this data underlines that UK GDP in the second quarter looks set to be expanding at a solid rate," he said.

"The question remains whether this is enduring and sustainable given the many risks that face the economy, but there is no doubt the economy is having a very good run indeed."

The BBC's economics editor Stephanie Flanders said that today's PMI figures were better than expected, and that the UK economy seems to have more momentum at the moment than it has had for a while.

However, she sounded a note of caution.

"Unfortunately, the growth we're seeing is still 'the wrong kind': that is to say, it's still being driven almost entirely by spending by households, rather than investment by companies or net exports."

"That does not feel like a very solid basis for the recovery, when most people's earnings are still falling, in real terms, and households are still sitting on a large amount of debt."

MPC meeting

The survey results sent the value of the pound up sharply on the currency markets as investors speculated that further stimulus action was less likely from the Bank of England.

Against the dollar the pound jumped 0.6% to $1.5250, while it rose 0.7% against the euro to 1.1762 euros.

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The figures were released on the day that the new Bank of England governor, Mark Carney, begins his first two-day meeting with fellow policymakers on the Bank's Monetary Policy Committee.

In the past few months, three of the nine-strong committee - including former governor Sir Mervyn King - have argued for more quantitative easing, and Mr Carney has been expected by many to back that approach.

However, Mr Williamson said: "With growth this strong, it's hard to see how any of the members of the Monetary Policy Committee could make a case for further quantitative easing.

"Policymakers are likely to argue that any action could perhaps be better geared towards trying to ensure the upturn is fully sustainable, such as measures to further encourage bank lending and business investment."

Eurozone stabilising

Meanwhile, PMI figures released by Markit indicated that the eurozone services sector continued to shrink last month, the 17th successive month of decline.

However, the index rose to 48.3, up from 47.2 in May, suggesting that companies are becoming less pessimistic about the economic outlook.

Markit also said that its composite PMI index - which covers all sectors - suggested the rate of decline in the eurozone was easing, with the index rising to 48.7 in June, up from 47.7 the month before.

"The survey is broadly consistent with GDP falling by 0.2% in the second quarter, similar to the decline seen in the first three months of the year," Mr Williamson said.

"However, there is good reason to believe that the region is stabilising and on course to return to growth during the second half of the year."

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