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UK service sector PMI reaches 55.3 in March

First-quarter index averaged its highest reading since second quarter of 2010.

The UK service-sector PMI (purchasing managers' index) hit 55.3 in March 2012, compared with 53.8 in February after accounting for seasonal factors, according to a survey conducted between 12 and 28 March by the Markit/CIPS (the Chartered Institute of Purchasing & Supply).

The indexes are calculated by assigning weights to the percentages. The percentage of respondents reporting an improvement/increase are given a weight of 1.0; the percentage reporting no change are given a weight of 0.5; the percentage reporting a deterioration/decrease are given a weight of 0.0.

If 100 per cent of the survey panel report an increase, the index would read 100. If 100 per cent reported no change, the index would read 50 (100 x 0.5), and so on.

The improved business climate and a modest rise in employment have contributed to the strong growth of both activity and new business in the country’s service sector during March 2012. Overall first-quarter growth was the strongest since the second quarter of 2010.

Service-sector firms kept on top of their increased workloads by adding to payrolls at a modest pace.

The 15th successive month of growth was also supported by growth in new business volumes and more work from existing contracts.

Chris Williamson, chief economist at the survey compilers Markit, said:

Faster growth of services activity in March indicates that the economy is on the up again, skirting recession as business continues to bounce back from the lull seen late last year.

The upturn accompanies a similar strengthening in construction activity and ongoing growth of manufacturing, suggesting the economy will have grown by as much as 0.5 per cent in the first quarter. The service sector is likely to have been a key driver of growth, expanding by around 0.7 per cent.

Business also remained upbeat about the year ahead, with confidence holding broadly steady on February’s 12-month high. Further growth should therefore be seen in the second quarter.

What’s particularly encouraging is that this revival of business confidence is encouraging firms to take on more staff. Service sector employment rose at undertaking marketing initiatives, which they are increasingly optimistic will pay off.

Market conditions remain difficult and we are not out of the woods by any stretch. A slight concern is the fastest rate for four years over the first quarter as a whole.

However, this is no run-away recovery. Although on the rise, job creation and inflows of new business continue to run well below rates generally seen in the years prior to the financial crisis.

David Noble, CEO of CIPS, said:

The UK service sector has rounded off Q1 in confident fashion, with growth at its highest since Q2 2010, showing that fears of a double dip recession were unfounded. Although some customers continue to seek more for less, consistent increases in activity alongside greater certainty over new business are positive signs for the year ahead.

Though the economy remains fragile, companies are responding to clients’ willingness to make firm business decisions, by hiring more staff and that the increase in new orders, crucial for sustained growth, continued to be outstripped by gains in overall activity during March.