Services sector bounces back after July slide

The UK's economy has shown its clearest indication yet that it has ridden out the initial post-Brexit vote business uncertainty with a robust bounceback from the linchpin key sector.

The services sector bounced back to growth last month. Picture: Malcolm McCurrach

However, economic experts gave warning that the wider economy still faced a notable slowdown in growth in the short-term, and that a further Bank of England (BoE) rate cut from historical lows of 0.25 per cent remains a possibility.

It came as the Markit/Cips services purchasing managers’ index (PMI) showed a reading of 52.9 in August, up from 47.4 in July and above economists’ expectations of 50.0.

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A reading above 50 indicates growth. The pound rose 0.4 per cent against the dollar following the update to $1.33, and rose 0.3 per cent against the euro at €1.194.

However, despite the August rebound in services – ranging from banking, insurance and hospitality to IT and professional services – Markit said the economy was still likely to have slowed to a crawl in the three months to September, growing by just 0.1 per cent compared with 0.6 per cent in the second quarter of the year.

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Chris Williamson, Markit economist, said: “Many companies remain worried about the political outlook and how the economy will fare (after) Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth.”

Scott Bowman, an economist at Capital Economics, said: “August’s Markit/Cips services PMI confirmed that the collapse seen in July was a temporary reaction to the shock of the vote to leave the EU. But we doubt that this will prevent the MPC (the BoE’s rate-setting monetary policy commitee) easing monetary policy further in November.”

In July, the month after the Brexit vote, the services sector, which accounts for about three-quarters of the UK economy, recorded its first contraction since December 2012.

The rebound comes after a surprise swing in manufacturing output in August, notching up its highest monthly rise in 25 years.

Figures last week showed that the construction industry, accounting for about 7 per cent of Britain’s GDP, also showed signs of recovery last month as the pace of decline in activity declined.

The Office for National Satistics also recently reported that output for the services sector grew 0.2 per cent between May and June, picking up from flat growth between April and May.