Comment: Services sector to the rescue

THANK heavens for the services sector. It has ridden to the rescue of Britain so many times now, in periods of economic strength and weakness, that its white hat and trusty steed appearing on the ridge may sometimes be taken for granted.
Martin FlanaganMartin Flanagan
Martin Flanagan

But, with manufacturing still facing the headwinds of strong sterling and a disturbed eurozone market, services has yet again taken up the slack.

The sector, accounting for about 75 per cent of Britain’s GDP, has posted a reading of 58.5 per cent on the Cips/Markit purchasing managers index (PMI) for June, in which 50 separates growth from contraction.

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It is a particularly sharp rebound from 56.5 in May, when the services industry was not immune from the pre-election uncertainty at the beginning of that month, and comfortably ahead of a consensus City forecast for last month of 57.3.. That May figure had unnerved financial markets, which look on services as its worry blanket when equities are under pressure, as it was the worst slowdown in growth in nearly four years.

But now, as the dust settles on the end of the coalition government and its replacement by a Conservative administration with a small majority, it seems normal service has been resumed for Britain’s finance, retail, transport, leisure, food and drinks and professional services industries.

Apparently, firms in the sector benefited from new product launches to produce the latest positive data. But it is just as likely that the industry has just regained hold of the previous momentum it had before the maverick electoral month of May.

It is good news for the economic recovery, and no doubt George Osborne will mention the strength of GDP in his Budget on Wednesday.

But every silver lining is tinged with a cloud, and many will point out that the government’s aim to make Britain a more balanced economy is so far conspicuously unsuccessful.

Services and construction are doing fine, but manufacturing remains patchy. And such a strong performance by the services sector does shift the dial a bit at the Bank of England as it weighs up when to push the button on higher interest rates after six years of them marking time at 0.5 per cent.

Nothing will be imminent in terms of monetary tightening. The Greek eurozone crisis rules that out virtually by itself.

But the Bank will note we now have strong British wage growth, a strong services sector and every likelihood of rising inflation as 2015 progresses.

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Such a backdrop, if it continues as is likely, would not make a rise in interest rates a major surprise.

Scylla and Charybdis

The Greeks vote tomorrow on whether to enter a period of prolonged economic hardship and have a chance of remaining in the euro, or to set sail on the good ship drachma with severely damaged rigging into stormy and uncharted waters after being ejected from the single currency.

Talk about being between the devil and the deep blue Aegean. The choice is amazingly tough, and it would not surprise me if it turned out a close vote.

It is a torturous choice for the Greeks between backing the orderly, predictable pain of years of austerity as the country takes the medicine prescribed by its EU creditors or to enter an unknown economic future that could turn out tantalisingly better or far worse than the pain of submission to a prolonged hairshirt lifestyle.

They are not to be envied, that’s for sure.

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