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UK economic growth bounces back as services sector expands UK economic growth bounces back as services sector expands
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The pace of UK growth is likely to have doubled in the past three months after a strong performance from the services sector , the latest business surveys suggest. Evidence that the UK economy has bounced back from a soft patch in the opening months of 2018 has emerged after a closely watched survey of the services sector showed stronger-than-expected activity last month.
Survey datas from IHS Markit suggests the economy grew by 0.4% in the second quarter, up from 0.2% in the first three months of the year. Britain had a sluggish first quarter when the “beast from the east” weather forced many shops to close, and staff struggled to get to work. In the latest sign that bad weather held back the economy during the first quarter, the health check by the Chartered Institute for Procurement and Supply and Markit reported the strongest growth in eight months.
Economists said an acceleration of growth in the second quarter, as well an inflation rate above the Bank of England’s 2% target, left policymakers at Threadneedle Street on course to raise interest rates in August. Inflation was 2.4% in May. Markit’s chief economist, Chris Williamson, said the improvement shown by the service sector suggested that the economy would expand by 0.4% in the second quarter – double its rate of growth between January and March.
Chris Williamson, the chief business economist at IHS Markit, said: “Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures [in the sector] spiked higher.” With the June CIPS/Markit surveys for manufacturing and construction also beating expectations, the City said chances of an August interest rate rise from the Bank of England’s monetary policy committee (MPC) had increased.
Britain’s service sector in June grew at its fastest pace since last October, according to the headline index on theIHS Markit/CIPS PMI report, which rose to 55.1 from 54 in May – above the 50 mark that divides expansion from contraction. It was stronger than City economists had expected and drove the pound slightly higher. “Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher,” Williamson said.
Businesses in the sector, which include bars, restaurants and hotels, and accounts for about three-quarters of the UK economy, took on new work at the fastest rate in just over a year. Firms said new product launches, marketing initiatives and improving economic conditions helped increase business. “It remains encouraging yet also surprising that current business activity continues to show such resilience amid relatively moribund confidence regarding the year ahead outlook.”
The CIPS/Markit purchasing managers’ index rose from 54.0 in May to 55.1 in June, with reports of a robust and accelerated pick-up in activity. Any reading above 50 indicates that the sector is expanding.
Ruth Gregory, a UK economist at Capital Economics, said that it was possible that the survey was underestimating the bounce-back in the economy because its findings do not include reports from retailing, which has been boosted in recent months by falling inflation, the royal wedding and the recent fine weather.
“The fact that the services survey also contained signs of a strengthening in domestically generated inflation also bolsters the chances that the MPC will press ahead and hike interest rates soon,” Gregory added.
Inflation was 2.4% in May and is still above the government’s 2% target despite falling back in recent months.
Three of the nine members of the Bank of England’s monetary policy committee voted for a quarter-point increase in official borrowing costs when it met last month, but August will see the release of Threadneedle Street’s quarterly update on the economy and is seen as a more likely date for a move.
Some analysts said, however, that the Bank might again delay raising rates – as it did in May – once hard economic data came in over the next few weeks.
Dean Turner, a UK economist at UBS Wealth Management, said: “Our expectation is that the data will not be strong enough to encourage the Bank to hike as soon as August.”
Businesses in the services sector, which include bars, restaurants and hotels, and accounts for about three-quarters of the UK economy, took on new work at the fastest rate in just over a year. Firms said new product launches, marketing initiatives and improving economic conditions helped increase business.
But companies reiterated that Brexit-related uncertainty had held back investment, affecting spending by large companies in particular.But companies reiterated that Brexit-related uncertainty had held back investment, affecting spending by large companies in particular.
At the same time, business costs have risen sharply on the back of surging oil prices and the need to offer higher wages.At the same time, business costs have risen sharply on the back of surging oil prices and the need to offer higher wages.
The rate of job creation in services firms remained modest in June, as firms struggled to recruit staff. Markit reported similar findings in its survey of the eurozone, where a pick-up in business activity in June pointed to 0.5% GDP growth in the second quarter, up from 0.4% in the first. This should encourage the European Central Bank to start tightening policy later this year.
The services report followed equivalent surveys from Britain’s manufacturing and construction sectors for June. The ECB has already set out plans to end its bond-buying programme by the end of the year, dismantling the economic stimulus a decade after the eurozone’s downturn started. However, interest rates are likely to stay on hold for quite some time, and ECB president Mario Draghi might leave office in October 2019 without having raised rates once during his eight-year term.
Factory growth was steady last month, although company bosses became gloomier about their outlook. The UK construction industry staged a stronger-than-expected recovery in June after the heavy snow earlier this year curtailed activity.
All three surveys beat expectations.
James Smith, the developed markets economist at ING, said: “This, much like the recent data emerging from the retail sector, suggests that the economy is having a better ride in the second quarter than in the first – and for the Bank of England, this will be put a fairly big tick in the August rate hike box. Policymakers were fairly relaxed about the sharp first-quarter slowdown when they met in May, and the most recent statement from June implied that view hasn’t changed.”
Economic growth (GDP)Economic growth (GDP)
Services sectorServices sector
Interest ratesInterest rates
Bank of EnglandBank of England
EconomicsEconomics
Economic policyEconomic policy
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