Services sector growth increasing

The UK economy received a welcome boost today as a key survey revealed the country's powerhouse services sector grew at its strongest rate in four months.

The Markit/CIPS Purchasing Managers' Index (PMI), where a reading above 50 indicates growth, showed services activity rose to 55.4 in July, up from 53.9 in June, and above its long-term average.

Growth in the sector, which represents 76% of the UK economy, was driven by business services and IT but falls were still seen in the financial advice market and hotels and restaurants.

A rise in new business to a three-month high was also recorded for the sector as a whole as demand improved, Markit/CIPS said.

Economists said the survey was a boost to third-quarter growth prospects and will be warmly received after a flurry of disappointing surveys and data - but cautioned that major headwinds remain.

The Markit/CIPS PMI data has now shown seven months of consecutive growth for the services sector.

Howard Archer, chief European economist at IHS Global Insight, said the survey raised hopes for third quarter growth after UK GDP slowed to 0.2% between April and June.

"This is a significantly better survey than expected and a welcome antidote to a recent flurry of disappointing data and surveys.

"However, while the rise in services activity and in new business in July lifts third quarter growth hopes, the fact remains that the UK economy faces major growth headwinds, notably the increasing fiscal squeeze, pressurised consumers and a slowing global economy."

Lingering uncertainty over the direction of the economy undermined expectations and hiring decisions, Markit said, with business confidence remaining at an historic low. Payroll numbers were also down fractionally in July.

There was some respite on the inflation front for the Bank of England with the survey showing the prices charged by service companies rose at the slowest rate since last September. Input price inflation also weakened but remained at an elevated level.

But CEBR economist Teodor Todorov said the survey was not strong enough for the Bank to consider lifting interest rates from historic lows of 0.5%.

He said: "Today's figures provide little support for the Bank to raise rates, especially in view of the contraction in employment in the service sector, as well as in the manufacturing and construction sectors, and only a marginal increase in prices."

PA