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Economy set to bounce back after service sector activity hits three-month high

The closely watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 54 in May, up from 52.8 in April.

Britain’s economy is on course to rebound from a snow-hit start to 2018 after activity in the dominant services sector jumped to a three-month high in May.

The closely-watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 54 last month, up from 52.8 in April.

A reading above 50 indicates growth.

The latest reading is the highest since February and comes after firms in the services sector enjoyed a bounce-back after the Beast from the East disruption in the first quarter, according to the survey.

Markit said the services data, which follows recent surveys from the manufacturing and construction sectors, suggests the economy is set to grow by between 0.3% and 0.4% in the second quarter, up from a paltry 0.1% in the first three months.

The data fuelled expectations for the Bank of England to rekindle its plans to hike interest rates, with economists saying an increase from 0.5% to 0.75% was “firmly on the table” for August.

Sterling lifted 0.5% to 1.34 US dollars and 0.4% to 1.14 euros after the services PMI data.

But the survey also revealed ongoing uncertainties over Brexit, which is weighing on new work orders and confidence among firms in the services sector – which accounts for around three-quarters of gross domestic product (GDP) in the UK.

Chris Williamson, chief business economist at survey compiler IHS Markit, said: “The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but, like the earlier manufacturing and construction surveys, raises questions about the outlook.”

“The signs of economic growth rebounding in the second quarter will likely up the odds of the Bank of England hiking interest rates again in coming months, likely August, but with the forward-looking indicators suggesting that the economy could relapse, a rate rise is by no means assured,” he added.

The survey showed the latest increase in new work received by service sector firms was still one of the weakest seen since the summer of 2016.

It found that firms in the sector – ranging from retailers to restaurants – believed subdued consumer spending and Brexit-related concerns among large corporate clients had weighed on new business growth in May.

The survey also saw business confidence across the sector ease back for the third time in the past four months, with Brexit worries remaining a top concern, as well as lacklustre consumer demand.

The data follows PMI readings from the manufacturing and construction sectors for May, which showed a slight increase to 54.4 and unchanged reading of 52.5 respectively.

James Knightley, chief international economist at ING, said the figures boost the case for a rate hike from the Bank of England.

He said: “These data releases keep the prospect of an August rate hike firmly on the table.

“But, if they do indeed go for it, we doubt it will be followed quickly with additional hikes given the economic threats from rising fuel costs, stagnant real wages, Brexit uncertainty and a reluctance amongst firms to invest in the UK.”

Howard Archer, chief economic advisor at the EY ITEM Club, warned worries over the economy remained and said an August rate hike was not a certainty.

He added: “The jury will likely remain out on the prospects for an August interest rate hike given that the Monetary Policy Committee wants to see sustained evidence that the economy is improving before tightening monetary policy.”

The Bank backed away from a widely-expected rate hike last month after the sharp slowdown in the first quarter.

It has said it expects growth to be revised up higher in the first quarter and to bounce back in the following three months, but so far official figures have failed to deliver any revisions to the dire first quarter data.

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