Services sector overcomes Brexit to hit ten-month high

Activity in the UK's powerhouse services sector jumped to a ten-month high in November as the economy showed further signs of resilience in the face of Brexit uncertainty.

The services sector accounts for about 75% of the UK economy. Picture: John Devlin
The services sector accounts for about 75% of the UK economy. Picture: John Devlin

The closely watched Markit/Cips purchasing managers’ index (PMI) reached a surprise 55.2 last month, up from 54.5 in October and above economists’ forecasts of 54. A reading above 50 indicates growth.

The PMI report said the strong performance from Britain’s dominant services sector, coupled with last month’s robust results from the construction and manufacturing industry, puts the UK economy on course to grow by 0.5 per cent in the fourth quarter.

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Today’s figures come after the services industry, which accounts for about 75 per cent of UK economic growth, saw its strongest rate of expansion since January, fuelled by a “solid increase” in new work.

While the Brexit-hit pound caused input price inflation to grow sharply in November, growth eased for the first time in six months.

Chris Williamson, chief business economist at IHS Markit, said the “sustained improvement” in the PMI surveys and rising prices will prevent the Bank of England from rolling out more monetary stimulus in the short term.

“The further upturn in the vast services sector shows that the pace of UK economic growth remains resiliently robust in the fourth quarter, despite ongoing uncertainty caused by Brexit,” he added.

“Rising prices – often linked to the weaker pound – are a big concern, however, and suggest that inflation is set to lift higher. The past two months have seen the steepest rise in businesses’ costs for over five-and-a-half years. These higher costs will inevitably feed through to consumers in the form of higher prices.”

Inflation is on course for a sharp jump as sterling’s 18 per cent slump against the US dollar and 11 per cent drop versus the euro feeds through to consumer prices.

Despite services firms feeling the pressure from the plunge in the pound, the employment picture was bright, with jobs growth accelerating at its fastest pace since April.

New business also pushed higher for the fourth month on the bounce, with the growth in backlogged work growing at its fastest rate since July last year.

However, Brexit concerns and the surprise victory of Donald Trump in the US presidential elections caused business expectations to drop back to their lowest levels since July.

James Knightley, ING senior economist, said the services sector continued to deliver strong performances because Britain had not triggered Article 50 and exited the European Union.

“Certainly the economy has held up much better than we had been expecting in the wake of the Brexit referendum outcome,” he added.

“This can be attributed in part to the fact that the UK is yet to trigger Article 50, meaning that nothing has changed yet, while the plunge in sterling has boosted the UK’s international competitiveness. We should also include the positives from a relatively smooth political handover to Theresa May as Prime Minister and the stimulus from the Bank of England.”

The Organisation for Economic Co-operation & Development (OECD) upped its forecasts for the UK economy last week, despite warning over higher inflation and slowing investment following the Brexit vote.

It raised its projections for Britain’s gross domestic product (GDP) from 1.8 per cent to 2 per cent for this year and from 1 per cent to 1.2 per cent for 2017. The OECD expects UK growth to hit 1 per cent in 2018.

The Bank of England predicts inflation will nearly treble over the next two years, shooting up to 2.7 per cent for 2017 and 2018.