Britain's services sector ended 2013 on a strong note. Sure, the snapshot provided by CIPS /Markit was a bit lower than the City had expected, but if there was a case for not reading too much into one month's data, this was it. Let's start with the headline number for the purchasing managers' index (PMI), which at 58.8 was well above the cut-off point of 50 that divides an expanding sector from one that is contracting. The average for the final three months of 2013 - a better guide to the underlying trend - was 60.4, slightly up on the previous quarter and far better than predicted at the start of the year. This is not a case where services are doing well but the rest of the economy is struggling. Last week's PMIs for manufacturing and construction were also upbeat and a weighted average of the three sectors would suggest that the economy grew by 1.5% in the final quarter of 2013. That looks far too high a number, in part because the PMIs have tended to overstate the pace of expansion and in part because the service sector component does not include retailing, where the absence of real income growth seems to have made consumers cautious in the runup to Christmas. Living standards hold the key to the performance of the economy in 2014. At present, businesses are in optimistic mood. It is worth noting, though, that the real strength of the service sector PMI came in business-to-business services: IT, transport and communication, and finance. The weakest sectors were those that depend on discretionary consumer spending: restaurants and hotels, and personal services. The outlook for the consumer-facing parts of the service sector should improve during 2014. Higher employment will in itself increase spending, but if it also increases competition for labour the upshot will be higher wages, which will be the first increase in real incomes since 2009.
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