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Economy expected to show recovery as services sector output hits four-month peak

The UK economy is expected to have picked up from a sharp slump at the beginning of the year after output in Britain's powerhouse services sector surged to a four-month high in April.

The closely-watched Markit/CIPS purchasing managers' index (PMI) reached 55.8 last month up from 55.0 in March and above economists' forecasts of 54.4.

A reading above 50 indicates growth.

The jump in services activity was underpinned by the fastest growth in new work this year, driven by robust business-to-business demand, new product launches and rising sales abroad.

The result delivers a hat-trick of good news for the UK economy after separate PMI figures earlier this week showed manufacturing output reached a three-year high in April and the construction sector rebounded to record its fastest growth this year.

Chris Williamson, c hief business economist at IHS Markit, said the three surveys point to UK gross domestic product (GDP) growing at 0.6% at the beginning of the second quarter after GDP slumped to 0.3% in the first quarter of this year.

"While we expect consumer spending to slacken in coming months, with the April survey highlighting continued weakness in sectors such as hotels, restaurants and other household-facing businesses, there's good reason to believe that at least 0.4% GDP growth can be achieved in the second quarter as a whole.

He added: "The strengthening of growth and the upturn in prices will bolster calls for higher interest rates.

"But weak growth in the consumer sector remains a concern, and is something which could intensify in coming months as consumer prices rise further."

The services sector, which accounts for around 80% of the UK economy, also enjoyed an employment lift, with job creation climbing to a four-month high in response to pressures on capacity.

But despite the industry's resilient performance, the impact of the Brexit-hit pound continued to loom large, as inflation drove up costs.

It triggered the steepest rise in prices charged by services sector firms since July 2008, with companies passing down higher input charges to customers.

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply (CIPS), said: "As prices and supply chain pressures will be the focus for business in the coming months, it is the consumer who will make or break the sector's progress if the political headwinds are favourable, disposable incomes improve and the pound's lacklustre performance improves."

Sterling was up 0.2% versus the US dollar at 1.29 following the announcement, while the pound traded slightly lower against the euro at 1.18.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the future for services sector firms was still bleak despite April's better-than-expected performance.

" Markit's survey ... suggests that the outlook for the services sector still is overcast.

"The balance of services firms expecting activity to increase over the following year fell to its lowest level for five months in April, and employment growth remains well below pre-referendum rates.

"Meanwhile, services firms are more vulnerable than manufacturers to losing access to the single market in any post-Brexit trade deal."

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