London: Britain’s key service sector grew much faster than expected in May, underpinned by the sharpest rate of new business growth in more than three years, indicating that an economic recovery is gaining traction.

The Purchasing Managers’ Index (PMI) for services, produced by Markit and the Chartered Institute of Purchasing & Supply and published on Wednesday, rose to 54.9 in May from 52.9 in April.

That was the strongest reading since March 2012, and easily beat the top forecast of 53.6 in a Reuters poll of 30 economists. The median forecast was 53.0.

The latest in a positive run of data, the figures are strong evidence the British economy will grow in the second quarter, and that it is on the mend after two years of stagnation.

Sterling rose against the dollar and government bond futures briefly fell on the news, as the data reinforced expectations that the Bank of England will refrain from further asset buying with newly minted money to stimulate the economy.

The news will be a relief for finance minister George Osborne, who has faced criticism at home and from the International Monetary Fund for a harsh austerity programme aimed at reducing Britain’s hefty deficit.

“The UK economy has moved up a gear, with all cylinders now firing," said Chris Williamson, economist at Markit.

“The increasingly buoyant picture and improved outlook painted by the PMIs effectively kills off any chance of the Bank of England’s Monetary Policy Committee voting for more stimulus such as asset purchases for the foreseeable future."

Services make up more than three quarters of the British economy. Although Wednesday’s figures do not cover retailers or the public sector, when combined with this week’s manufacturing and construction surveys they point to possible GDP growth of 0.5% in the second three months of the year, said Markit.

Britain grew 0.3% in the first three months of 2013.

“Once again the outturn is not only above expectations but above the top end of the City forecast range," said Ross Walker, economist at Royal Bank of Scotland. “It certainly reinforces the notions that growth in Q2 is at least matching Q1."

Winter is over

The arrival of better weather in May boosted new business numbers, Markit said, after an unusually cold March and April which many companies have cited as a factor in weak earnings.

In the PMI survey, new business rose to 57.2, up from 54.2 in April and the highest since February 2010, as clients were increasingly willing to commit, the survey panel found.

Input prices at a one-year low also helped sentiment.

The services survey covers transport, storage and communication, financial intermediation, business services, personal services, computing and IT, and hotels and restaurants.

The composite index, which also incorporates Monday’s manufacturing and Tuesday’s construction surveys, rose to 54.3 in May, the highest since March 2012, after all produced positive readings.

The Bank of England holds its June policy meeting on Wednesday and Thursday to decide whether to boost the economy with further quantitative easing. Economists polled by Reuters last week predicted that there would be no change to the now-dormant programme.

The meeting will be Mervyn King’s last before he is replaced by Mark Carney as governor on 1 July.

“New governor Mark Carney will have the benefit of taking the reins of an economy that is already showing signs of acquiring ‘escape velocity’ from the doldrums it has been wallowing in for much of the last two years," said Markit’s Williamson.

However, prospects for a strong British recovery may still hinge on a return to growth in the euro zone, its biggest trading partner. Euro zone surveys on Wednesday were slightly more upbeat in tone than last month’s, but suggested the bloc’s recession will continue through the current quarter. REUTERS

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