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Record low inflation and borrowing costs should keep services sector in fine fettle - EY ITEM Club comments

By CreditMan Wednesday, May 6, 2015

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“Against a recent run of mixed economic data, a surprise improvement in April’s CIPS services survey provides reassurance that a decent economic expansion is still on track, with the survey’s headline activity index rising to an eight-month high. With the tailwinds offered by record low inflation and borrowing costs, 2015 should continue to see the services sector in good health.

“However, April’s strong services reading has to be set against declines in the PMI’s for manufacturing and construction in the same month. Consequently, a weighted average of the three surveys dipped slightly in April. But this still left the composite reading above the average level for the previous 12 months and well above the average for Q1. So while very early days, GDP growth in Q2 looks set to advance on Q1’s modest 0.3% rate.

“One thing that won’t hold back activity in Q2 is any prospect of the Monetary Policy Committee (MPC) hiking interest rates. Indeed, April’s service survey showed prices charged by services providers falling for the first time since October and at the fastest rate in over three years. This further evidence of a firmly ‘noflationary’ environment adds more weight to our view that interest rates will be seeing no increase following the MPC’s next meeting on 11 May, or in 2015 as a whole.”