Upbeat services sector to drive economic growth

Growth in the UK’s dominant services sector is expected to pick up in the months ahead, despite a fresh study showing a slowdown among consumer-facing businesses such as hotels, bars and restaurants.

Services account for more than three-quarters of the UKs economic output. Picture: Andrew Stuart

Although today’s survey, from the CBI, found business volumes in the consumer arena grew at their weakest rate for a year, employment among professional services firms, such as accountants and lawyers, rose at the fastest pace since November 2007.

The report comes in the wake of the closely-watched Markit/Cips purchasing managers’ index, published earlier this month, which showed the services sector registered an eight-month high of 59.1 for July, up from 57.7 the previous month and well above the 50 reading that separates growth from contraction.

Services account for more than three-quarters of the UK’s economic output, and economists said the sustained growth would fuel speculation that interest rates could start rising from their record low of 0.5 per cent later this year, despite inflation falling further below the UK government’s target.

Expectations of a rate hike grew in some quarters last week when minutes from the Bank of England’s monetary policy committee revealed two members – Ian McCafferty and Martin Weale – had voted to raise borrowing costs at this month’s meeting.

The CBI found 43 per cent of consumer services firms reported a rise in business volumes in the three months to August, while 17 per cent said they were down, giving a balance of 25 per cent – the slowest pace of growth since August 2013. However, 39 per cent said they expected to enjoy more robust expansion in the coming quarter, as did 34 per cent of professional services companies, where those surveyed reported the fifth consecutive quarter of expansion in business volumes.

Katja Hall, deputy director-general of the employers’ organisation, said: “The slowing in the pace of growth and profits in the service sector reflects our view that momentum in the economy will ease in the second half of the year. But this doesn’t necessarily mean a gear change in the recovery. It’s encouraging that our service sector firms continue to feel upbeat, especially when looking ahead to the next quarter.”

Among the professional services sub-sector, 44 per cent of firms said employee numbers were up on three months ago, while 11 per cent reported a fall. The resulting net balance of 33 per cent was the highest reading since November 2007 and compared with a figure of 5 per cent for consumer-facing businesses.

Expectations for employment growth hit a record level of 
46 per cent in the business-facing arena, which also includes marketing companies.

Today’s figures come after accountant BDO said business confidence rose strongly in July, with firms north of the Border reporting that hiring intentions have surpassed pre-crisis levels.

Hall added: “Employing more staff and planning to increase investment are positive steps in the quest for sustainable growth. However, skills shortages mean it is increasingly hard for firms to find and hire the right people.

“It’s important that business and government address this issue together, to put the economy of the future on the right footing.”