Britain's service sector rebounded in January after a snow-hit December and retail sales rose unexpectedly in March, data showed on Wednesday, raising hope of a decent pick-up in first-quarter GDP.
The pound rose and gilts fell on the data, as investors moved to price a more than 50 percent chance that the Bank of England would raise interest rates in May.
Investors believe the strength of first-quarter GDP data, due on April 27, will be crucial in determining the speed with which the Bank of England raises interest rates from their current historic low of 0.5 percent.
Services output grew by 1.3 percent on the month — its fastest monthly expansion since July 2002 — following a 1.1 percent decline in December, according to the Office for National Statistics.
All five sub-sectors contributed to the recovery, with hotels and restaurants up 4.4 percent on the month, transport up 1.7 percent, distribution up 1.4 percent, business services up 1.4 percent and government services up 0.7 percent.
The figures offer the first official glimpse of how the sector, which accounts for more than three-quarters of the Britain's economy, fared in the first quarter of the year.
"At face value it is quite robust," said Alan Clarke, UK economist at BNP Paribas. "Growth in January has made up for the terrible December, but it is still early days to gauge the strength of first-quarter growth."
GAUGING THE UNDERLYING TREND
Gauging the strength of the recovery has been complicated by weather distortions following Britain's coldest December in a century.
Heavy snow and ice led to transport chaos at the end of 2010, contributing to a fall of 0.5 percent in UK GDP in the final quarter.
Analysts reckon first-quarter growth will need to be at least 0.8 percent to persuade a majority on the BoE's Monetary Policy Committee to vote to raise interest rates in May.
It will be a finely-balanced decision. Consumer sentiment has crumbled, wages are rising at less than half the rate of inflation and data earlier this week showed real household disposable income fell last year for the first time in three decades.
Although markets are pricing in just over a 50 percent chance of a UK rate hike in May, the majority of economists polled by Reuters does not expect rates to go up until August
A survey from the Confederation of British Industry showed retail sales rose unexpectedly in March, but the underlying trend remained weak. Sales growth in the three months to March was the slowest since July.
"Relative to historical levels the balance is not very upbeat and consistent with subdued retail sales growth," said Blerina Uruci, UK economist at Barclays Capital.
A procession of British retailers have said trading conditions have got worse since Christmas, adding to fears the government's fiscal squeeze aimed at slashing its deficit is too much, too soon, for a country emerging from a deep recession.
Dixons, Britain's No.1 electricals retailer, issued a profit warning and a gloomy forecast for 2011-12 on Wednesday, following a downbeat assessment from supermarket chain J Sainsbury a week ago.
The Office for National Statistics said most of January's bounce in services activity was simply making up for ground lost in December. Without weather distortions, growth over the two months as a whole would have been little better than flat.
