Service sector bounceback 'set to keep growth stable'

The UK's services sector rebounded in August, but could struggle going forward as Britain prepares to leave the EU

THE UK's dominant service sector saw a welcome rebound in activity last month, but optimism among firms hit a five-month low amid increasing anxiety over Brexit negotiations.

The closely watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 54.3 in August. A reading above 50 indicates growth.

This was up from 53.5 in July, when activity expanded at its slowest pace since April due to the heatwave, the football World Cup and Brexit uncertainty.

It was also more than expected, with most economists pencilling in a reading of 53.9 for August.

The survey puts the economy on course for stable growth of 0.4 per cent in the third quarter, according to survey compiler IHS Markit, but raises concerns over the outlook.

It found that business confidence for the year ahead dropped to its lowest since March, as firms fret over political uncertainty and the "unpredictable impact of Brexit on clients' business operations".

Chris Williamson, chief business economist at IHS Markit, said: "Faster service sector growth comes as much-needed welcome news after disappointing manufacturing and construction PMI surveys in August.

"The survey data indicate that the economy is on course to expand by 0.4 per cent in the third quarter, a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month."

But Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), warned over "dark clouds of political indecision" hampering further service sector growth.

The survey saw all three sectors record sharp falls in business expectations for the year ahead, following downbeat manufacturing and construction PMIs earlier this week.

There had been fears for UK growth after PMI survey figures showed output from the manufacturing sector fell to its lowest level in more than two years in August, while construction activity also dropped sharply last month.

But buoyant activity in the services sector - which accounts for around three-quarters of output - should offset the gloom elsewhere and maintain growth at the 0.4 per cent pace recorded in the second quarter, according to economists.

This will help dispel concerns in some quarters that the Bank pushed the button too soon on a rate hike last month, to 0.75 per cent from 0.5 per cent.

Next week's rates meeting will also be watched closely for the Bank's thoughts on how the economy is holding up in the face of Brexit fears and prospects for further rate increases.

Howard Archer, chief economic adviser at the EY ITEM Club, said another rise is unlikely any time soon.

He said: "The mixed set of August PMIs reinforce belief that it will be some considerable time before the Bank of England raises interest rates again after August's hike from 0.50 per cent to 0.75 per cent.

"It looks unlikely that interest rates will rise again until after the UK leaves the EU in March 2019 given the major uncertainties that are likely to occur in the run-up to the UK's departure."

The latest services PMI showed a slightly stronger rise in incoming new work during August, as well as a rebound in employment growth - to its fastest for six months.

The survey showed Brexit uncertainty continued to hold back business-to-business spending, in particular for large-scale projects, but there was also some subdued demand from clients in the UK retail sector.

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