Economy could grow in second quarter

LONDON (Reuters) - The economy could return to growth in the second quarter of this year, the compiler of the closely-watched purchasing managers’ indices said on Wednesday, after its all-sector reading indicated overall growth in May.

A man carries a flag of St George as he walks past the Canary Wharf area of London April 2 2009. REUTERS/Phil Noble

Markit’s all-sector composite PMI, which combines output readings from construction, services and manufacturing, rose to 50.4 in May -- the first time it has been above the 50.0 mark that separates growth from contraction since March 2008.

“If sustained, the rise in the PMI surveys into June would indicate an increase in GDP as early as Q2 (albeit an extremely modest rise),” said Chris Williamson, Markit chief economist.

The economy shrank 1.9 percent in the first quarter of this year, the sharpest rate of decline since 1979, and economists polled by Reuters do not expect a return to growth until the first quarter of next year.

They have forecast a drop of 0.7 percent in GDP in the second quarter.

Markit said a “heavy dose” of caution was required because of difficulties in comparing its surveys with official readings of gross domestic product during the recession.

Economists agreed.

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“The PMI did not help in forecasting the magnitude of the drop in GDP over the past six months,” said Allan Monks, an economist at JP Morgan.

“But as the PMI returns closer to its usual range of fluctuation, it increases our confidence about using the survey to forecast where growth is running.”

While the dominant services sector PMI indicated growth with a better than expected reading of 51.7 in May, the manufacturing and construction surveys are still in the red -- suggesting there may be some way to go before a broad recovery kicks in.

The Bank of England has said there is a great deal of uncertainty around when the recovery will come and how strong it will be, especially if banks continue to remain reluctant to lend.

Markit said its composite measures for mainland Europe showed output in Germany, France, Italy and Spain are still shrinking.

“Current trajectories (if sustained) imply that growth will not be seen until August for the euro zone as a whole,” Williamson said.

Reporting by Matt Falloon, editing by Mike Peacock