British Service Sector Growth Soars Again In August - PMI

by
Reuters
A rush of new business last month drove the fastest growth in Britain's services sector for more than six years, according to another survey that challenges the Bank of England's cautious outlook for the economy.

A rush of new business last month drove the fastest growth in Britain's services sector for more than six years, according to another survey that challenges the Bank of England's cautious outlook for the economy.

Wednesday's Markit/CIPS UK services purchasing managers index (PMI) rose to 60.5 in August from 60.2 in July, its highest level since December 2006, holding well above the 50 growth threshold for the eighth consecutive month.

Economists polled by Reuters had predicted growth would slow slightly, forecasting an index reading of 59.0.

Instead, order books at companies ranging from banks to restaurants filled at the fastest pace since May 1997, the month Tony Blair first became prime minister.

Like the previous month, the PMI showed British businesses were at the forefront of Europe's nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.

"The UK service sector turned in another stellar performance in August, building on the growth momentum seen during July," said Paul Smith, senior economist at survey compiler Markit.

"Moreover, the sector's recovery, which has been evident since the start of the year, has legs."

The composite PMI, which incorporates manufacturing and construction data from earlier in the week, rose to 60.7 in August from 59.5, its highest level since the series began in 1998.

Britain looks on course this quarter to better its 0.7 percent quarterly economic growth from April through June, said Smith.

While that is welcome news for Britain's government after roughly three years of stagnation, the data pose a potential headache for Bank of England Governor Mark Carney.

He has stressed the economy needs a lot more help from the central bank's record-low interest rates before it is back to health, and does not plan to raise interest rates until unemployment falls to 7 percent, something that he forecasts is at least three years away.

Some investors have not been convinced that he will be able to keep rates low for that long - although the BoE's forecast that unemployment will prove slow to fall may be on the mark, as the services PMI showed that firms' hiring slowed to its weakest pace so far this year.

The Bank's Monetary Policy Committee announces the result of its meeting on Thursday, and economists do not expect it to change tack.

 

BACK-TO-BACK

July and August's services PMIs marked the first back-to-back readings above 60 since 1997.

Before the 2008-09 recession, such strong rises in the services PMI were often followed by rises in interest rates.

However, the depth of the downturn put a stop to that correlation. Even with last quarter's growth, the economy is still around 3 percent smaller than its pre-recession peak in the first quarter of 2008.

And although the new orders index hit 61.3 in August from July's 60.0, leaving it just seven ticks shy of the survey record, the sharp fall in the jobs index showed the labour market still has some way to improve.

"If activity and sales can maintain their current growth velocities, then higher payrolls and ... increased wages should hopefully follow suit," said Smith from Markit.

The survey also showed the rise in prices charged to customers slowed slightly last month, which at least suggests the upturn in business is unlikely to be the cause of a spike in inflation soon.