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Blog - UK services firms power ahead to raise hopes slowdown was a blip

Britain’s powerful services sector accelerated in October as demand picked up and confidence ballooned.

It joins the manufacturing industry in growing unexpectedly strongly into the autumn, raising hopes that this year’s slowdown in economic growth could be past the worst.

The services sector’s purchasing manager’s index, an influential survey from IHS Markit, climbed to 55.6, up from 53.6 in September and beating expectations of 53.3.
ny score above 50 indicates growth.

The surveys for all sectors beat expectations to create a combined score of 55.3, the strongest number since April.

Chris Williamson, IHS Markit’s chief business economist, believes this puts the UK economy on track to grow by 0.5pc in the final quarter of the year, accelerating from 0.3pc in the second quarter and 0.4pc in the third.

“The good news was that October saw business activity across services, manufacturing and construction grow at its fastest rate for six months. The data point to the economy growing at a quarterly rate of 0.5pc, representing an encouragingly solid start to the fourth quarter,” he said.

Analysts expect this to result in a modest improvement to growth over time, with Capital Economics predicting a steady expansion into 2018.

“Overall, the survey is consistent with our view that the economy has held onto its recent momentum in the fourth quarter and should post reasonable growth of 2pc or so next year,” said UK economist Ruth Gregory.

“As a result, it might not be too long before the Bank of England’s Monetary Policy Committee moves again. We envisage a second rate hike in the second quarter of 2018.”

The survey also contained hints that inflation could start to fade.

Price pressures have risen strongly in the past year, largely because of the pound’s sharp fall following the EU referendum.
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Growth should pick up further if the PMI scores are right. Source: ONS, IHS Markit
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But this could be coming to an end.

The input prices component of the PMI survey fell to 61.7 last month, indicating that prices are still rising but at the slowest pace since September last year, when businesses’ costs really started to take off.

There are also signs of risks to the outlook, as companies trimmed back the pace of hiring.

The employment part of the index slowed to 52.4, the slowest rate since March, in a sign that companies remain cautious despite the rise in new orders from customers.

The Bank of England announced yesterday it would raise interest rates from 0.25pc to 0.5pc, which could also add to businesses’ nerves, according to Duncan Brock at the Chartered Institute of Procurement and Supply.

“The main source of longer-term anxiety continues to be the path to Brexit. Service providers are concerned that political uncertainty is damaging the confidence to invest and weighing down on business optimism among their clients,” he said.

“At the same time, it remains to be seen whether consumers will be spooked by the recent rate rise and will curb their spending, adding to the service sector’s uncertainty about future prospects.”