UK services sector posts major growth

bounceback

The UK’s services sector has posted its biggest monthly increase for 20 years, with industry bouncing back strongly from the temporary post-Brexit lull.

The latest CIPS/Markit Purchasing Managers’ Index (PMI) reveals that both services output and new business witnessed major growth in August as stability and long-term confidence returned to the markets.

Any index reading above 50 indicates growth in the market, with August’s figure standing at 52.9. This is in comparison to the 47.4 in July, with the 5.5 point gain representing the biggest one-month gain since the survey was first created two decades ago.

In particularly, computing and IT, financial services, hotels and restaurants were all seen to contribute to the recovery in the service sector in August.

Employment has also seen an upturn, with 14 per cent of companies increasing staff numbers to meet the needs of long-term investments, new business and new product launches.

Hat-trick of good news

The latest services data follows positive figures in the manufacturing and construction sectors and is a broad indication that the initial slowdown in activity following the UK’s decision to leave the European Union is short-lived.

Chris Williamson, chief business economist at IHS Markit, said it suggests that any doom mongering about impending recession was misplaced.

He added: “A record rise in the services PMI adds to the encouraging news seen in the manufacturing and construction sectors in August to suggest that an imminent recession will be avoided."

Mr Williamson conceded it may be slightly too early to say whether the August upturn is the start of a sustained post-shock recovery, but there is “plenty of anecdotal evidence” to indicate that the initial surprise at the referendum outcome has begun to wane.

Broader economic factors

The sentiment was echoed by Scott Bowman from Capital Economics, who said strong month-on-month rebounds must be weighed against subsequent growth, and went on to predict that the Bank of England (BoE) would cut interest rates further later this year.

In August the Monetary Policy Committee made the historic decision to cut the base rate to an all-time low of 0.25 per cent, which had an immediate impact on many homeowners by reducing their mortgage repayments, but further cuts have been predicted as BoE governor Mark Carney seeks to further boost the economy.

David Noble, group chief executive officer at CIPS, says business optimism has “ricocheted back to pre-Brexit levels”, thanks to a combination of market stability reassuring decision-makers and clients bringing dormant projects back to life.

He added: “Whether this steadiness continues will largely depend on the service sector’s reaction to the UK government’s approach to the Brexit negotiations, as the sector keeps one eye on business as usual and one eye on possible obstacles ahead.”

Analysts will now look towards the next BoE announcement on September 15 and the subsequent reaction of the markets for an indication of what September’s PMI figures may hold, and whether the strong gains made since the initial shock of the Brexit vote will continue and further bolster the economy.

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