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Surging services sector - the cloud to the silver lining Surging services sector - the cloud to the silver lining
(35 minutes later)
Is a booming service sector good or bad news? On balance, of course, news that what is by far the biggest sector of the economy performed better than analysts were expecting last month, is positive. But the cloud to this silver lining is that the latest snapshot of services provides ammunition for interest rate hawks pressing for an increase in the cost of borrowing.Is a booming service sector good or bad news? On balance, of course, news that what is by far the biggest sector of the economy performed better than analysts were expecting last month, is positive. But the cloud to this silver lining is that the latest snapshot of services provides ammunition for interest rate hawks pressing for an increase in the cost of borrowing.
Two things stand out about the Markit/CIPS services PMI report. The first is the headline number for the purchasing managers' index. At 59.1 it was not only well above the 50 cut-off level that separates an expanding from contracting services sector, but also the highest since last November. The survey is not totally comprehensive, excluding retailing, energy and government-provided services. In recent times it also tended to point to rather stronger growth than the official data from the Office for National Statistics. But the latest health check is still consistent with growth of around 0.8% in the third quarter of 2014. Two things stand out about the Markit/CIPS services PMI report. The first is the headline number for the purchasing managers' index. At 59.1 it was not only well above the 50 cut-off level that separates an expanding from contracting services sector, but also the highest since last November. The survey is not totally comprehensive, excluding retailing, energy and government-provided services. In recent times it also tended to point to rather stronger growth than the official data from the Office for National Statistics. But the latest healthcheck is still consistent with growth of around 0.8% in the third quarter of 2014.
That would continue the trend recorded in the first half of the year, and would surprise the Bank of England, which is expecting the pace of growth to ease back.That would continue the trend recorded in the first half of the year, and would surprise the Bank of England, which is expecting the pace of growth to ease back.
The second feature of note in the PMI is that firms are reporting that they are starting to raise wages. Stronger demand is leading to an increase in hiring, and that is feeding through into the level of pay. Again, this runs counter to official data, currently showing annual earnings growth of 0.7% excluding bonuses.The second feature of note in the PMI is that firms are reporting that they are starting to raise wages. Stronger demand is leading to an increase in hiring, and that is feeding through into the level of pay. Again, this runs counter to official data, currently showing annual earnings growth of 0.7% excluding bonuses.
Up until now, the Bank's monetary policy committee has been unanimous in voting for interest rates to remain pegged at 0.5%. But two schools of thought are emerging about where policy should go from here. One points to evidence of a slight cooling in the housing market, the high level of consumer indebtedness and the weakness of earnings to urge caution about raising rates too quickly. The other believes it is only a matter of time before annual growth in excess of 3% and a sharp fall in unemployment feeds through into higher wages, and that there is a danger of the Bank falling behind the curve.Up until now, the Bank's monetary policy committee has been unanimous in voting for interest rates to remain pegged at 0.5%. But two schools of thought are emerging about where policy should go from here. One points to evidence of a slight cooling in the housing market, the high level of consumer indebtedness and the weakness of earnings to urge caution about raising rates too quickly. The other believes it is only a matter of time before annual growth in excess of 3% and a sharp fall in unemployment feeds through into higher wages, and that there is a danger of the Bank falling behind the curve.
Tuesday's report from Markit/CIPS provides ammunition for the second camp. The MPC starts its two-day interest-rate setting meeting on Wednesday. The chances of the first split vote in three years and of dearer borrowing by the end of the year have increased.Tuesday's report from Markit/CIPS provides ammunition for the second camp. The MPC starts its two-day interest-rate setting meeting on Wednesday. The chances of the first split vote in three years and of dearer borrowing by the end of the year have increased.