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Services sector grows at fastest rate in months despite cost hike

By Rachel Martin and PA

Published 04/11/2016

Sterling's slump proved a double-edged sword boosting export activity and tourism, but also causing inflationary pressures
Sterling's slump proved a double-edged sword boosting export activity and tourism, but also causing inflationary pressures

The UK's services industry pushed ahead last month despite costs rising at their fastest rate in more than five years. Growth of total business activity accelerated to its fastest rate in nine months, as did growth of new business contracts, according to the Markit/CIPS services purchasing managers' index.

The index covers the services industry and measures the productivity of businesses involved in transport, communication, financial intermediation, business services, personal services, computing, IT and hotels and restaurants as an indicator of the strength of the UK economy.

Employment also rose for the third consecutive month - albeit at a weaker rate than over the past three years - while business expectations rebounded from July's near seven-year low.

Firms said new business opportunities, rising international demand for UK services caused by the weaker pound, improving market confidence and promotional campaigns had contributed to an increase in orders.

The Markit/CIPS services purchasing managers' index hit 54.5 in October - up from 52.6 in September and above economists' expectations of 52.5.

A reading above 50 indicates growth.

But the collapse in the value of the pound following the Brexit vote saw input price inflation reach its highest level since March 2011.

Sterling's slump proved a double-edged sword for the services sector, boosting export activity and tourism, but also causing the price of fuel, salaries and food to increase.

Stephen Kelly, Manufacturing NI chief executive, said the findings reflected the feelings of Northern Ireland manufacturers, but added that the weakened pound had brought problems.

He said: "Those who are exporting are receiving a bounce. However, the largest part of the manufacturing community doesn't and is fighting to retain margin and struggling to agree better prices with customers as input costs have risen sharply with the weakened pound. Alongside these rises in raw material costs are increasing costs in energy and wages, leading to a marked deterioration in competitiveness.

"Input costs are around three times the rise in final customer prices. At present, problems are being stored up for 2017 so some good news in the forthcoming Autumn Statement from the Chancellor and our Stormont Budget is greatly needed."

Input costs showed the largest monthly increase seen in 20 years of survey data collection. As a result, prices in the services industry - which accounts for around 75% of the UK economy - rose at a rate not seen for more than five years.

Howard Archer, chief UK and European economist at IHS Global Insight, said the report suggested the UK economy began the fourth quarter at a good pace following resilient growth in the third quarter.

"While the economy has seemingly started off the fourth quarter pretty well, we still suspect that it will find life an increasing struggle during 2017 - as the fundamentals for consumers weaken markedly and as uncertainty is fuelled by Article 50 being triggered by the end of March and likely very difficult negotiations with the EU increasingly come to the forefront," Mr Archer added.

Belfast Telegraph

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