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Services sector growth accelerates despite costs increase

Published 03/11/2016

Total business activity accelerated at levels not seen since January
Total business activity accelerated at levels not seen since January

Output in Britain's powerhouse services sector pushed ahead last month despite costs rising at their fastest pace for more than five years.

The closely watched Markit/CIPS services purchasing managers' index (PMI) hit 54.5 in October, up from 52.6 in September and above economists' expectations of 52.5.

A reading above 50 indicates growth.

Total business activity accelerated at levels not seen since January, but the collapse in the value of the pound since the Brexit vote saw input price inflation reach its highest level since March 2011.

Chris Williamson, chief business economist at IHS Markit, said the encouraging picture for the UK economy was being tainted by inflationary pressures.

But he said business activity growth was in line with an economic expansion of 0.4 to 0.5% in the fourth quarter.

"What's especially reassuring is that growth is also becoming more balanced," he added.

"Manufacturing is leading the expansion as exporters benefit from the weaker pound, but services growth is also reviving and construction is being boosted by renewed house building.

"The ugly flip-side of the weaker pound is clearly evident, however, with the rate of increase of service providers' costs showing the largest monthly acceleration seen in 20 years of survey data collection."

The PMI report said the rise in business activity was underpinned by strong expansion of incoming business, with new contracts growing at their fastest rate for nine months.

Employment also rose for the third consecutive month, while business expectations rebounded from July's near seven-year low.

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

It caused the services industry, which accounts for around 75% of the UK economy, to raise prices at a rate not seen for more than five years.

The pound has fallen around 20% against the US dollar and about 15% against the euro since Britain voted to leave the European Union.

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

He added: "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."

The update on the services sector comes after PMI reports showed the manufacturing sector held steady last month, while a ''solid'' rise in housebuilding work helped construction activity hit a seven-month high.

It was disclosed last week that the UK economy bucked expectations of a substantial slowdown in the three months after the Brexit vote thanks to a ''strong performance'' from the services sector.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.5% in its first estimate of third-quarter growth, down slightly from 0.7% in the second quarter, with economists pencilling in a steeper fall to 0.3%.

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