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Services sector 'shows UK is defying expectations of Brexit-driven slowdown'

Services sector activity jumped to a 17-month high in December as the British economy continues to exhibit signs of resilience in the face of Brexit uncertainty.

The closely watched Markit/CIPS services purchasing managers' index (PMI) reached 56.2 in December, up from 55.2 in November and above economists' forecasts of 54.7.

A reading above 50 indicates growth.

The figures mean the powerhouse sector, which makes up 80% of UK GDP, has grown at the fastest pace since July 2015.

The PMI report said the sharp expansion in December rounded off the strongest quarter of the year, driven by new business and increased hiring.

Sentiment towards the outlook for the next 12 months also strengthened, despite ongoing uncertainty regarding Brexit and European elections, it added.

However, data also signalled that inflationary pressures in the sector remained substantial, with prices rising at the strongest rate since April 2011 following the collapse in the value of sterling.

Chris Williamson, chief business economist at IHS Markit, said: "A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown. The faster growth of services activity follows similar news of improvements in the manufacturing and construction sectors at the end of 2016.

"At face value, this improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut, but policymakers are clearly concerned about the extent to which Brexit-related uncertainty could slow growth this year."

The data follows strong readings from the manufacturing and construction sectors earlier this week.

However, economists believe a combination of political uncertainty, higher inflation and squeezed household incomes will dampen the outlook for 2017.

Dean Turner, UK economist at UBS Wealth Management, said: "The robust nature of recent economic data has been supported by a number of factors, in particular the weaker pound, as well as looser monetary and fiscal policy.

"As we move further into the year, our expectation is that these positive effects may begin to fade. Moreover, higher inflation is likely to erode household income growth which could dampen the up-to-now buoyant consumer."

Inflation is on course for a sharp jump in 2017 as sterling's deep slump against the dollar and the euro - triggered by the vote to quit the European Union - feeds through to consumer prices.

Nevertheless, the UK economy was unexpectedly revised up last month, with gross domestic product (GDP) expanding 0.6% in the third quarter, up from a previous estimate of 0.5%, according to official figures.

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