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Services sector boom may have eliminated threat of recession

The threat of recession hanging over the UK has lifted after a surprise surge in the services sector last month.

The boost in activity was accompanied by an increase in jobs and reports of an improved economic climate.

Coming on top of strong manufacturing and construction data released earlier this week, economists now declare that the UK has dodged a double-dip recession.

After a 0.3 per cent decline in gross domestic product in the final quarter of 2011, the UK would enter recession if it contracted again in the first three months of this year.

But the closely-watched Markit/CIPS services survey showed acivity in the all-important sector jumped to 55.3 in March - up from 53.8 in the previous month and easily beating City forecasts of a fall to 53.4.

The figure indicates that in the first three months of 2012 the services industry grew at its fastest pace since the second quarter of 2010.

Last month, respected international thinktank the OECD predicted that the UK's economy would shrink by 0.1 per cent in the first quarter of 2012, meaning it was already back in recession.

But today, CIPS chief executive David Noble said: 'The UK service sector has rounded off the first quarter of 2012 in confident fashion, with growth at its highest since the second quarter of 2010, showing that fears of a double dip recession were unfounded.'

And Markit suggested when the improved manufacturing and construction reports are taken into account, the economy may have grown by as much as 0.5 per cent in the first quarter of 2012 - more than making up the ground lost at the end of last year.

The services report revealed a modest rise in employment in March, reflecting confidence remaining close to the previous month's 12-month high.

Over the first quarter of 2012 as a whole, staffing levels in the sector increased at its fastest rate for four years, in a boost for the Government's hopes that the private sector can start to replace some of the jobs axed from the public sector.

The report showed that new business increased at 'a solid pace', with service sector companies reporting that their customers were more willing to make firm decisions.

However, there were also warnings that 'this is no runaway recovery', as job creation and inflows of new work are still below rates generally seen before the recession.

And cost pressures remained, with oil prices pushing up the price of transport and leaving profit margins under pressure amid weak consumer spending.

The threat of the UK entering a technical recession has disappeared, the Ernst & Young ITEM Club said today.

Andrew Goodwin, its senior economic adviser, forecast GDP was likely to have grown by at least 0.3 per cent in the first three months of the year.

'What is even more encouraging is the firm pick-up in new business and the increased level of enquires, which suggests that this upturn has legs,' he said.

'We appear to be seeing an improvement in business-to-business spending in particular, which seems to be a result of greater corporate confidence. Many firms put their spending plans on hold at the back end of last year, because of concerns over the escalation of the eurozone crisis and its impact on growth prospects.'

But he cautioned that we are still in for a bumpy time, with the additional Bank Holiday for the Queen’s Diamond Jubilee in June a 'formidable obstacle' to continued recovery, and GDP still expected to decline modestly in the April-June period.

Howard Archer, economist at IHS Global Insight, said: 'Given the dominant role of the services sector in the economy, the relatively upbeat purchasing managers’ survey for March provides a major lift to hopes that the economy saw clear growth in the first quarter.

'Furthermore, it follows on from improved manufacturing and, especially, construction surveys so the signs are that the economy picked up generally during March.

'We currently estimate GDP growth at around 0.3 per cent quarter-on-quarter in the first quarter, and the improved purchasing managers’ surveys mean that there is a chance that this could be on the pessimistic side.

'At the very least, the OECD’s estimate that the UK economy contracted by around 0.1 per cent quarter-on-quarter in the first quarter so moving into recession looks ever more highly doubtful.'

Mr Archer said it 'seems a stone dead certainty' that the Bank of England will leave both interest rates and the quantitative easing programme unchanged at the monetary policy committee meeting tomorrow.

Meanwhile, Samuel Tombs, UK economist at Capital Economics, said: 'The improvement in March’s CIPS report on services added to the evidence that the overall economy expanded in Q1 and has therefore avoided a technical recession.

'But we would not conclude that the economic recovery is back on track yet.'

He warned: 'Even if the economy did grow in the first quarter, the prospect of a renewed rise in tensions in the eurozone, further fiscal austerity and high oil prices (for now at least) suggest that the economy will struggle to expand in the coming quarters.'

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