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Services sector output continues recovery after Brexit slump

Published 05/10/2016

The services sector accounts for around three-quarters of the UK economy
The services sector accounts for around three-quarters of the UK economy

Output in Britain's powerhouse services sector continued to recover last month from a shock contraction after the Brexit vote, as new business expanded at its fastest pace since February.

The closely watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 52.6 in September, down from 52.9 in August but above economists' expectations of 52.

A reading above 50 indicates growth.

The update comes after the industry, which accounts for around three-quarters of the UK economy, slumped in the first month after Britain voted to leave the European Union, hitting 47.4 in July.

David Noble, group chief executive at the Chartered Institute of Procurement and Supply, said the services PMI results will bring much-needed cheer to policymakers.

"Though the overall activity index still remained below its long-term average and had dipped slightly compared to August, it reflected a modest revival of fortunes for services businesses."

The PMI report said September's reading was weak compared with previous performances, coming in below a long-run level of 55.1.

It meant activity for the industry hit an average of 50.3 for the third quarter - its lowest for four years.

Employment levels pushed ahead at the end of the third quarter after stalling in July, while job creation accelerated at its fastest pace for five months.

It said the rise in new business was fuelled by growing demand from foreign firms looking to take advantage of sterling's sharp drop to 31-year lows following the EU referendum result.

However, the plunge in the value of the pound also ramped up cost pressures, as input price inflation reached its highest level in more than three years. It was also higher than the survey's two-decade long-run average.

The latest figures come after PMI reports showed a ctivity in the construction sector grew for the first time in four months in September, while manufacturing output reached its highest for more than two years last month.

Chris Williamson, chief business economist at IHS Markit, said: "Across the three sectors, the pace of economic growth signalled was the strongest since January, fuelling greater job creation as companies shrugged off short-term Brexit worries and enjoyed the benefits of a weaker currency.

"The improvement suggests the economy has regained a growth rate of approximately 0.3% after recovering from the initial shock of the EU referendum in late June.

"If July's low is included, the PMI surveys point to a mere 0.1% expansion of GDP in the third quarter, but this probably overstates the weakening in the rate of growth."

Official figures for the services sector published on Friday showed output expanded 0.4% in July, defying expectations of a post-Brexit vote slump.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said he is still pencilling in a slowdown in services growth as cost pressures start to bite, but expects the Bank of England to hold fire from cutting interest rates in November.

"We continue to expect growth to slow over the coming quarters, as firms hold back from hiring and investment due to 'hard' Brexit risk and households' real incomes are squeezed by rising inflation.

"Indeed, note that services' firms reported the fastest rate of input price inflation since February 2013 in September. Demand likely will soften when these cost increases are passed on to customers."

The Office for National Statistics (ONS) revised up its reading for the UK economy last week, with GDP growing 0.7% in the second quarter, up from a previous estimate of 0.6%.

UK GDP grew by 0.4% in the first three months of the year.

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