Belfast Telegraph

Saturday 26 July 2014

Services sector fuels economy hopes

The CIPS survey has now signalled expansion for the past 16 months, with the June performance rounding off the sector's best quarter since the start of 2011 and one of the best in the last two decades

Britain's dominant services sector grew at its fastest pace for 16 years in the third quarter of the year, fuelling hopes that the overall economy will have performed better than already-buoyant expectations.

The closely watched Markit/CIPS purchasing managers' index (PMI) showed that activity in the sector - which accounts for three-quarters of UK output - increased at the highest rate since the second quarter of 1997 from June to September

Combined with strong performance from other sectors this week, economists said it suggested growth for the period of around 1.2% - a level not reached since the third quarter of 2007.

It would represent a sharp improvement on the 0.7% growth in the second quarter of this year. Official data for the third quarter will be published later this month.

A headline reading for September of 60.3 for services - where 50 separates growth from contraction - was a slight fall on August's seven-year high of 60.5 and follows a slight slowing in expansion also recorded for manufacturing and construction.

The services sector figures showed that increases in activity and new business saw a return to solid employment growth after a slowdown in August, after the upturn meant increasing backlogs of work, prompting bosses to add to payrolls.

It means the sector has been growing continuously over nine months.

Firms reported improved business confidence leading to a greater willingness to commit to new contracts.

However fuel inflation and some rising wages saw operating costs continue to soar, with companies unable to pass them on because of price competition.

Vicky Redwood of Capital Economics said the figures were "more evidence that the recovery is becoming well-entrenched".

She said that taken together the surveys from all three sectors suggested gross domestic product (GDP) growth of 1.3% in the third quarter, likely to be around 1.2% when other factors such as retail sales and industrial production were included.

However, official data, which has been a little less optimistic than the surveys, suggested this "might be a tall order", she added, giving a forecast of 0.9%.

Chris Williamson, chief economist at survey compilers Markit, said growth in the services sector was being led by financial services - linked to increased housing market activity - and the business sector.

However, consumer services continued to suffer amid the continuing squeeze on household incomes due to weak pay growth lagging behind inflation.

But he said: "There are encouraging signs that the strong pace of expansion will persist in the coming months."

Surveys showed the mood among households improving, he added. He said the figures for all three sectors suggested the economy had grown up to 1.2% in the third quarter, though output in total would remain 2.2% off its pre-crisis peak.

David Noble, chief executive of the Chartered Institute of Purchasing and Supply, said: "After nearly six lost years of economic output, the UK economy looks to have really found its feet.

"The numbers reflect the stability we are currently seeing in the global economy, and the services sector is taking full advantage."

Howard Archer, chief UK and European economist at IHS Global Insight, said the figures were likely to add to growing conviction on markets that the Bank of England will raise historically low interest rates by early 2015.

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