Best services growth in 16 years fuels economy hopes

Britain’s services firms have seen their strongest quarterly growth in 16 years, according to the latest survey snapshot of the economically dominant sector.

The Markit/Cips Purchasing Managers’ Index eased slightly to 60.3 in September but remained well above the 50 reading which separates growth from contraction. Over the third quarter of this year the index averaged its highest level since 1997.

The survey also showed that services firms’ expectations of future business grew at a faster rate than in August. Incoming new business also continued to expand strongly. Britain’s services sector accounts for around three-quarters of the economy. Recent PMI surveys of the manufacturing and construction sectors have also indicated expansion.

City economists said the surveys boded well for a healthy overall GDP reading in the third quarter, after the second quarter’s 0.7% expansion. “For now, there is no mistake the economy is growing jolly fast,” said David Tinsley of BNP Paribas.

However, the latest services survey also showed employment in the sector continued to grow strongly in September, a trend that could pose a headache for the Bank of England and its forward guidance policy on interest rates. The Bank has forecast that significant spare capacity in the economy will keep unemployment above 7% until the second half of 2016 and therefore push an interest rate rise off the table for three years. But many City traders expect the jobless rate to fall more rapidly.

The survey also showed that the strongest services growth last month was in the financial sector, which Markit’s chief economist Chris Williamson said could reflect the pick-up in the housing market.

Financial markets were calm today despite the government shutdown in America and the threat of a default later this month by the world’s largest economy. The FTSE was up 0.21% to 6450.93 in morning trade. Sterling was steady against the dollar and 10-year gilt yields rose 3 basis points to 2.75%.