Belfast Telegraph

Warning of two-tier economy as services sector lifts hopes

By John-Paul Ford Rojas

The UK's dominant services sector lifted hopes that the economy is on the cusp of surpassing pre-recession levels after posting an improved performance in April.

A better-than-expected reading of 58.7 in the Markit/CIPS purchasing managers' index (PMI) – where a mark of 50 separates growth from contraction – adds to expectations that gross domestic product (GDP) is about to recover to its position in 2008.

But the Northern Ireland Economic Outlook from PwC warned that we faced a two-tier economic recovery with unskilled and low-paid workers losing out.

The outlook said key indicators showed the economy was "well on its way to recovery" with nine months of continuous improvement in manufacturing and services. However, construction and retail remained subdued, with employment falling in both sectors over the last two years.

Markit said it suggested the private sector was taking on staff at the fastest rate in the 16-year history of the survey, with jobs growth of about 100,000 a month.

Economists said the buoyancy of the recovery is likely to bring forward a date for interest rates to rise from their historic low of 0.5%.

The services sector, which represents three-quarters of UK output, saw its strongest monthly performance in 2014, according to the survey. It added to strong monthly figures for manufacturing and construction – though growth in the latter slowed down.

Growth for services UK-wide was reflected in the Ulster Bank's PMI for March, which found that business accelerated for Northern Ireland's services sector, with new orders close to a record high and employment growing at its fastest rate since August 2007.

UK services have now seen 16 straight months of growth, and April saw marketing campaigns and new product launches bearing fruit.

Employment rose at the fastest rate since October and optimism remained high.

Chris Williamson, chief economist at Markit, said: "The UK economic recovery shows no signs of running out of steam, and growth could accelerate further in the second quarter."

GDP growth for the first three months of the year was 0.8%.

"Such a rate of growth in the second quarter would lift gross domestic product above its pre-recession peak, extending further the strongest spell of economic growth that the country has seen since the financial crisis struck," Mr Williamson said.

He added that the strength of the recovery and employment, together with rising house prices, would "heat up" Bank of England discussions over interest rates later this week – though for the time being these are expected to remain on hold at 0.5%. Markets have been expecting a rate rise next spring.

But James Knightley, of ING Bank, said: "While there is no real prospect of action at this week's Bank of England policy meeting, it looks as though the odds of a policy shift this year are shortening."

Alan Clarke, of Scotiabank, said the data back growing expectations that the UK economy will grow by 3% or more this year, which should "contribute to a rate hike sooner rather than later".

Figures last week showed that the UK economy grew for a fifth successive quarter at the start of 2014, leaving it just 0.6% below its pre-recession peak, paving the way for gross domestic product to surpass that level in the current second quarter.

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