Services bounces back with fastest growth since October 2017


PMI survey for June suggests economy recovered in second quarter after weak start to the year

Better weather and increased demand for financial services boosted UK services in June, with activity growing at its fastest rate since October 2017, a survey of businesses reported on Wednesday.

The IHS Markit services purchasing managers’ index rose to 55.1 in June, up from 54 in May. Analysts had expected the index to remain steady at 54.

This is the highest level since autumn and suggests that services, which collectively account for 80 per cent of the British economy, bounced back in the second quarter after a weak start to the year.

“Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate rise, especially when viewed alongside the news that inflationary pressures spiked higher,” said Chris Williamson, chief business economist at IHS Markit.

Members of the Bank of England’s Monetary Policy Committee have suggested that weakness in the first quarter was primarily due to snow storms but have been looking for data to confirm a rebound before pushing ahead with a rate rise.

Surveys for the construction and manufacturing sectors published earlier this week also pointed to growth in activity, although respondents to the manufacturing survey indicated the sector “remained subdued”.

“The survey data indicate that the economy likely grew by 0.4 per cent in the second quarter, up from 0.2 per cent i n the opening quarter of 2018,” Mr Williamson said, adding there were indications that higher oil prices and rising wages would contribute to higher inflation.

Companies reported that the rise in demand had led them to bump up against their capacity and said they faced difficulties in recruiting workers.

Ruth Gregory, senior UK economist at Capital Economics, said that “if anything the surveys might be understating growth” as the services PMI does not include the retail sector, where data has indicated that businesses are enjoying a boost from a combination of sunshine and events such as the Royal Wedding and World Cup.

Respondents to the PMI survey said there had been a “general upturn in client demand”, especially for business and financial services. A rise in global mergers and acquisitions activity will have helped Britain’s network of lawyers, bankers and consultants.

However companies also said that Brexit-related uncertainty had hit investment spending, particularly by large corporate clients.

Sterling rose modestly after the release of the data, rising from $1.317 to $1.3192.

Source: FT