Ernst & Young ITEM Club - the services sector has rediscovered its mojo and is driving recovery

3 July 2013

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Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, comments on today’s PMI figures:

  • The services sector has rediscovered its mojo and is driving the recovery
  • We’re on course for Q2 GDP growth to be the strongest for 2 years
  • The chances of more QE tomorrow have been reduced from slim to almost zero

"This is the latest in a string of encouraging data releases which confirm that the UK is well on the road to recovery. Finally the services sector appears to have rediscovered its mojo and it is generating a momentum which looks less and less likely to be derailed.

"The PMIs are flagging renewed momentum across the economy, with the three surveys reporting 4-5pt increases in the activity balances since February. A pessimist could say that we’ve been here before, most notably in 2011 when the recovery soon fizzled out. But this time it looks different, with the surveys also reporting much stronger order books, both at home and abroad, which suggests that this time the pick-up in activity has genuine legs. Throw yesterday’s BCC survey into the mix as well and you have evidence of a broad-based pick-up.

"These results put us on track for GDP growth of 0.5% or more in Q2. If we ignore the distortions caused by one-offs, such as the Olympics, then this would be our strongest quarterly growth for two years.

"The chances of more QE this month were always very low, but this release must reduce it to almost zero. Indeed, we could even see some of those who have voted for more QE previously move back across the table to re-join the majority. As things stand, the only way that we can see further QE happening is of the Bank decides that gilt yields are rising too quickly and need to be reined in."