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Services sector bounces back despite costs triggered by Brexit-hit pound


The services sector bounced back despite cost pressures from the Brexit-hit pound

The services sector bounced back despite cost pressures from the Brexit-hit pound

The services sector bounced back despite cost pressures from the Brexit-hit pound

Services output has rebounded to its strongest rate this year, jumping to a three-month high in March despite cost pressures continuing to bite.

The closely watched Markit/CIPS services purchasing managers' index (PMI) rose to 55 last month, up from 53.3 in February and above economists' expectations of 53.4.

A reading above 50 indicates growth.

The powerhouse sector, which accounts for around 78% of the UK economy, saw business activity bounce back from a five-month low in February to its strongest level for 2017, as client demand strengthened.

However, mounting costs triggered by the Brexit-hit pound loomed large over the sector, with prices charged by services firms rising at levels not seen since the financial crisis.

Sterling pushed into positive territory on the currency markets shortly after the announcement, with the pound up 0.2% against the US dollar at 1.247 and 0.2% ahead versus the euro at 1.168.

Separate PMI figures earlier this week showed manufacturing output eked out its weakest growth in eight months for March, while construction activity was dragged back over the period by a slowdown in housebuilding.

Chris Williamson, IHS Markit chief business economist, said despite the strong performance, the services sector failed to "change the picture of an economy that slowed in the first quarter".

He said: "The relative weakness of the PMI survey data compared to that seen at the turn of the year suggests the economy will have grown by 0.4% in the first quarter, markedly lower than the 0.7% expansion seen in the fourth quarter of last year.

"The March uptick in the PMI surveys merely brings the data in line with a neutral policy stance at the Bank of England.

"As such, the data add to the sense that, with economic and political uncertainty likely to intensify as the Brexit process gets under way, policymakers are likely to continue to stress the need to look through any further upturn in inflation and focus instead on the need to keep policy on hold to support economic growth."

The PMI report said new work also grew at its strongest rate this year, but some firms flagged that Brexit uncertainty was causing investment decisions to be put on hold.

On the flip side , it said sterling's slump since the EU referendum result had sparked new international sales inquiries, especially from the United States.

Despite prices charged by services firms rising at the fastest rate since September 2008, the level of input price inflation eased back to a four-month low in March.

It added that financial firms were weathering the choppier trading conditions, while hotels, restaurants, gyms and hairdressers saw their performance wane.

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply (CIPS), said the weak pound gave exporters "reasons to be cheerful", but the industry was struggling to create jobs.

"A dark blot on the sector's performance was the lifeless job creation. At its lowest level since August 2016, the demand for higher wages bore down on profits and new staff hiring.

"So, the sector's stalwart performance this month will need to improve significantly, before businesses raise their headcounts further."

The latest official data from the Office for National Statistics (ONS) showed services sector output fell by 0.1% in January, following a rise of 0.2% in December.

The ONS confirmed on Friday that gross domestic product (GDP) grew by 0.7% in the fourth quarter of 2016, as the UK economy finished the year on a solid footing.

It came as separate figures revealed that household saving rates had hit record lows as consumers plundered their nest eggs to keep spending in the face of rising inflation.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "Growth in services activity remains well below the sorts of rates that would persuade the (Bank of England's) Monetary Policy Committee (MPC) to hike interest rates this year, despite strengthening in March.

"The services sector looks vulnerable to slowing further now that businesses are passing on higher costs to customers in earnest."