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Services sector in its greatest recruitment period since 1997


Investec chief economist Philip Shaw

Investec chief economist Philip Shaw

Investec chief economist Philip Shaw

Employment in Britain's dominant services sector grew at its joint fastest rate for 17 years in May, as the wider economy looks set to surpass its pre-recession peak.

Services, which represents three-quarters of UK output, equalled the best rate of employment growth seen since May 1997, according to the closely watched Markit/CIPS Purchasing Managers' Index (PMI).

The sector's overall performance posted a reading of 58.6 – where 50 separates growth from contraction – which was a slight fall on April's 58.7, but still strong.

Manufacturing and construction have also posted a slight slowdown but their combined overall performance was enough to prompt further speculation about the Bank of England bringing forward an interest rate hike.

Chris Williamson, chief economist at Markit, said: "The UK economy continued to boom in May, in what is the best spell of growth since 2007."

Reports from the three sectors "collectively suggest that the economy is on course to grow by 0.8% again in the third quarter", Mr Williamson said. "That would push the economy above its pre-crisis peak," he added.

At the end of the first quarter of this year, the UK's gross domestic product (GDP) was still 0.6% off its 2008 high.

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Employment readings across the economy sustained a high seen in April, indicating private sector employment growth of as much as 250,000 to 300,000 for the second quarter, Mr Williamson said.

Alan Clarke of Scotiabank said the combined reading from all sectors was "consistent with very solid GDP growth into the middle of the year at least".

He said that in the past this was a level that "would have been screaming out rate hikes" but that wage growth and higher inflation remained weak – but an improvement in these could mean that "a hike is possible this side of Christmas".

Bank of England policy makers are expected to leave interest rates on hold this week.

The services PMI report indicated "sharply rising levels of activity" in the sector and confidence in the future remaining high. Average wage costs also grew.

Jobs growth, seasonally adjusted, matched its performance in October last year. It has not been higher since May 1997.

On a non-seasonally adjusted basis, yesterday's reading was the highest since May 1997.

David Noble, chief executive of the Chartered Institute of Purchasing and Supply, said: "Firms in the services sector are creating jobs at a level seen only once since 1997 and offering bigger salaries to boot; a sign of ever-increasing confidence in the sector, which is enabling firms to support expansion and take advantage of improved economic conditions."

Investec chief economist Philip Shaw said: "We are in the sweet spot of the cycle where you are getting good news on the recovery but we aren't getting an inflation threat. My one hesitancy is that CIPS has over-predicted the services sector in the past few quarters."

Despite growing pressure on the Bank to move on rates, Mr Shaw believes the MPC will not move until the middle of next year and said the US Federal Reserve was also unlikely to raise rates.