Brexit latest: Record jump in services activity in August as sector recovers from post-Brexit vote shock

The latest Purchasing Managers’ Index shows return to growth with reading of 52.9 in August, following severe slump in July

A cheaper pound boosted tourism and the services sector in August (Getty)

The UK’s dominant services sector roared back to growth in August with a record jump in activity after experiencing its biggest slide since the last recession in the wake of the Brexit vote.

The latest Purchasing Managers’ Index (PMI) of activity showed a reading of 52.9, up from a seven-year low of 47.4 in July.

Any reading above 50 indicates growth.

Back to growth

Markit/CIPS

The 5.5 point jump was the largest in the 20-year history of the survey, said Markit/CIPS, which produce the monthly indicator.

City of London economists had expected a reading of 50.

In response the pound instantly rose by around three quarters of a cent against the dollar to $1.3364, although it surrendered the gains later in the day.

The services reading completes a trio of positive survey reports for the UK economy, which indicate that it is coping with the shock of the vote better than many feared.

Last week the PMI for manufacturing showed a surprise return to growth in August, with a record monthly increase.

Construction activity also improved in August according to the PMI, although it was still in contraction territory.

Services is, however, easily the most significant of the three indicators, since the sector accounts for 80 per cent of UK output.

A sharp fall in all three PMIs in the immediate wake of the Brexit vote had indicated, based on historic associations, that the UK was set to contract by up to 0.4 per cent in the the third quarter of 2016, signalling a possible return to recession.

Survey bounceback

Markit/CIPS

The Bank of England cut interest rates to a record low of 0.25 per cent in August and slashed its growth forecasts, heavily influenced by the major July PMI fall.

The Bank said it expected to cut again later in the year if the economy continued to deteriorate.

Last month’s strengthening of the PMI surveys could change those calculations.

There is little “hard” economic data since the referendum, but a retail sales report for July from the Office for National Statistics also indicated that consumers carried on shopping in the wake of the vote.

However, some economists advised caution about assuming that the August improvement in the PMIs meant the economy was now out of the woods.

“Just as the July survey probably overstated the economy’s underlying weakness, the August survey probably overstates its subsequent recovery,” said Scott Bowman of Capital Economics.

"We think an average of the July and August surveys paints a more accurate picture of the economy post-Brexit. And this is consistent with quarterly GDP growth of close to zero."

Dean Turner of UBS said: “It’s still too early to conclude that the UK has escaped the Brexit vote unscathed.”

“We still expect growth to slow to zero in the second half of the year, although the current quarter may be a little stronger than anticipated, followed by greater weakness in the fourth quarter.”

Services businesses surveryed by Markit attributed the August bounceback to higher exports and a boost in tourism, helped by the pound’s record depreciation in in the wake of the June vote.

The pound’s slump also helped push service input price inflation to a 33-month high and in response firms raised their own prices at the fastest rate since January 2014.

Economists said this showed consumer price inflation, which picked up to 0.6 per cent in the year to July, was likely to head sharply higher over the coming months.

Job creation in the sector resumed after a pause in June, albeit weakly.

“Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to ‘Buck Brexit’ and carry on regardless,” said Christ Williamson of Markit.

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