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INSTANT VIEW - Service sector returns to growth in May

LONDON (Reuters) - The service sector staged a surprise return to growth in May after an increase in new business and the most optimistic outlook since October 2007, the monthly services PMI survey showed on Wednesday.

The headline index rose to 51.7 from 48.7, beating analysts’ forecasts of a more modest rise and taking the index above the 50-mark that separates growth and contraction, the survey by the Chartered Institute of Purchasing and Supply and Markit said.

ECONOMISTS’ VIEWS

COLIN ELLIS, DAIWA SECURITIES

“Today’s reading is probably the first genuine bit of good news on activity for many months, as oppose to ‘less bad’ data.

“And it will bolster hopes that the UK economy as a whole can start growing sooner rather than later -- GDP may well still fall in Q2, but a rise in the third quarter is looking more likely by the day.

“Yet the problem in the UK is not so much the near term as next year -- with credit growth still constrained, unemployment set to rise much further, and sterling showing signs of life, it is hard to believe that the economy will bounce back strongly in 2010.”

HOWARD ARCHER, GLOBAL INSIGHT

“At the worst, GDP seems likely to contract only modestly in the second quarter. Light currently seems to be burning much more brightly at the end of the recessionary tunnel and it is very possible that some limited growth could occur before the end of the year.

“However, economic and financial conditions remain very difficult and we suspect that relapses in activity are highly likely with the result that sustainable growth will not develop until 2010 and then only gradually.

“The Bank of England is very aware of the serious handicaps that still stand in the way of sustainable recovery. It seems likely to keep interest rates down at 0.50% deep into 2010. The Bank of England may very well also further extend its quantitative easing programme, but probably not this Thursday.”

PETER DIXON, COMMERZBANK

“It’s telling us the UK economy has turned round, perhaps more quickly than we had anticipated. A composite PMI is now also above 50 and that leads us to hope that activity growth in Q2 will be only slightly negative, it may even be flat. But the fact of the matter is we do appear to be around 3 months ahead of where we expected to be in the cycle.

“I think we’ll have to wait and see just how durable this recovery proves to be. To a large degree it shows that the massive fiscal and monetary stimulus would appear to be having some effect.

“We need to see more signs the economy is responding and in terms of what policymakers do, in the short term, they’ll keep their foot flat on the floor and if they do see things recovering, they’ll gradually start to ease off, but we’re a long way from that yet.”

VICKY REDWOOD, CAPITAL ECONOMICS

“The survey shouldn’t be taken entirely at face value. It was too upbeat relative to the official data in Q1 and other surveys -- like that recent published by CBI/Grant Thornton -- suggest output is still falling.

“What’s more, there is no guarantee that the survey will keep rising, or even hold onto its recent gains. Nonetheless, for now the trend is clearly up. And while a weighted average of the three CIPS surveys is still consistent with a fall in GDP in Q2, the drop could be a pretty minimal one.”

JAMES KNIGHTLEY, ING

“Coupled with the firm gain in the Nationwide consumer confidence reading overnight and the healthy gains seen in the manufacturing equivalent on Monday it looks increasingly possible that the UK will see positive GDP growth in 3Q09.

“This would be a remarkable turnaround for the UK economy and suggests sterling’s rally has further to run. Nonetheless, there are ongoing headwinds (deleveraging, higher savings, less credit availability, higher taxes and lower government spending) which will mean the recovery will likely be characterised as mild rather than vigorous.”

ROSS WALKER, RBS

“It’s an encouraging number. We had a huge fall in services output in Q1. I don’t think we’ll necessarily get growth in Q2 but it does suggest that by Q3 we could see some positive output from the predominant sector of the economy.

“It certainly provides reassurance the economy is gaining traction, but again there are questions over the resilience of final demand once the inventory cycle has worked its way through.”

BRIAN HILLIARD, SOCIETE GENERALE

“It’s across the board a very good survey. It’s different to the euro zone one as it excludes the retail survey, but the market will love it.”

Return to GDP growth? “Not in Q2 -- there’s a possibility in Q3 but we’d need to see the breakdown.”

SURVEY COMPILER’S VIEW

PAUL SMITH, MARKIT

“May’s survey data signalled a welcome return to growth of a sector that accounts for a substantial proportion of UK economic output, which raises the chances that overall GDP in Q2 will fall at a slower rate than currently expected.

“Growth in May was supported by a gain in new business in line with rising market confidence, although reports of competitive pressures and subsequent price discounting to support sales indicated that the business climate remained tough overall.”

“While the surge in business confidence recorded in the sector points to further near-term growth of activity, there remain some downside risks to sector performance going forward.

“These stem mainly from household spending, which is likely to remain subdued given the wave of job cuts seen across both the service sector and the economy as a whole.”

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