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Rises in UK productivity, service output signal stronger recovery

Visitors admire St.Paul's Cathedral from the restaurant floor of the Tate Modern gallery in London March 15, 2007. REUTERS/Alessia Pierdomenico

LONDON (Reuters) - British services output inched up in July and productivity rose across the economy for the first time in two years in the second quarter, suggesting the country's recovery is moving onto a firmer footing.

The dominant service sector's output rose 0.2 percent in July from the previous month and 1.8 percent from July last year, the Office for National Statistics said on Friday.

Separate official data showed that productivity in terms of output per hour worked rose 0.5 percent in the second quarter - the first quarterly increase since the second quarter of 2011.

"The UK recovery is showing signs of becoming sustainable as improved optimism feeds through to the hard data and the return of growth kick-starts productivity," said Rob Wood, an economist at Berenberg.

Analysts think Britain's economy accelerated in the July-September period to grow about 1 percent from the previous three months. It expanded 0.7 percent in the second quarter.

Howard Archer, an economist at IHS Global Insight, said the service sector data maintained expectations that the economy would pick up speed in the third quarter, pencilling in a 0.8-0.9 percent quarterly rise in gross domestic product.

"Healthy service sector activity played a key role in the UK's improving growth through the first half of the year and it clearly got off to a decent start in the third quarter," he said.

Growth in services - which make up more than three quarters of Britain's output - appears to have also been strong in August when a survey of purchasing managers found the fastest overall expansion in the sector in more than six years.

Trends in productivity across the economy have taken on particular importance for the path of British interest rates since the Bank of England's August pledge to keep borrowing costs ultra-low while unemployment remains above 7 percent.

The central bank thinks Britain's workers will become more productive as the economy recovers, reducing the need for more hiring and delaying the fall in joblessness to the 7 percent threshold till at least late 2016.

However, some economists and investors argue that Britain's productivity took a permanent hit after the financial crisis and reckon unemployment will fall much faster, potentially pushing up inflation. The BoE has said high inflation expectations could cause it to drop its plan to keep interest rates on hold.

Analysts said that while the productivity figures were broadly positive, it was too early to draw any conclusions on what they mean for the central bank.

Compared with a year earlier, output per hour was 0.4 percent lower in the second quarter, and the average British worker still produces less than before the financial crisis.

(Reporting by Olesya Dmitracova and William Schomberg; Writing by Hugh Lawson)