UK services PMI improves as prices surge

Oliver Haill Sharecast | 03 Aug, 2017 09:47 - Updated: 10:42 | | |

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UK services activity continued to gently improve last month amid the fastest increase in average prices for three months, according to a widely followed survey released on Thursday.

The Markit/CIPS services purchasing managers' index for July rose to 53.8 from 53.4 the prior month, slightly above the consensus forecast of 53.6.

This pointed to a sustained increase in business activity across the UK service sector, Markit said, though the rate of expansion remains relatively subdued.

The pace of job creation crawled up to its strongest level for a year-and-a-half and the future activity index picked up a bit from June’s six-and-a-half-year low.

Higher operating expenses, as input cost inflation was driven by rising food prices, energy bills and salary payments, the sector saw the fastest increase in average prices charged by service sector firms for three months.

Chris Williamson, chief business economist at IHS Markit, said: "The service sector PMI indicates that businesses remain in expansion-mode despite heightened uncertainty about the outlook, but also highlights how the risks to future growth remain firmly biased to the downside."

Taken together with the stronger manufacturing and weaker construction PMI surveys earlier in the week, he said the trio was "broadly consistent with economic growth of just over 0.3%, putting the country on course for another steady but sluggish expansion in the third quarter".

While the current picture indicated the economy was proving resilient in the face of concerns about the outlook, he said the subdued level of business optimism "suggests it’s likely that growth will at least remain modest and could easily weaken in coming months".

The services PMI numbers looked "solid", said Ruth Gregory at Capital Economics, suggesting that the economy "has maintained the momentum that it gathered over Q2", estimating the economy was growing at "just under 0.5%" at the start of the third quarter.

"Admittedly, the PMIs have been too upbeat relative to the official GDP figures recently. This time, though, there are some reasons to think that the official figures may come in a bit stronger, not least due to the strong rise in output in the hard data in June which sets a good base for growth in Q3.

"Meanwhile, although evidence of a reasonable start to Q3 could bolster the hawks on the Committee, there have been little signs of a firming in wage and domestic cost pressures," she said, adding that her name to those who think the Bank of England's Monetary Policy Committee will stand pat on interest rates later on Thursday.

Sam Tombs at Pantheon Macroeconomics agreed that the figures imply the economy would grow 0.3% in the third quarter and still "isn’t strong enough to warrant higher interest rates".

While a weighted average of Markit’s PMIs still is well below levels that have prevailed when the MPC has raised interest rates in the past, Tombs noted that the MPC met on Wednesday to make its policy decisions, "so they won’t have seen July’s services report".

Overall, felt Howard Archer, chief economic advisor to the EY ITEM Club, the PMI surveys "point to a UK economy continuing to struggle to get out of a low gear", maintaining the suspicion that Q3 is likely to see ongoing slow UK GDP growth.

"It is notable that UK GDP expansion of 0.3% quarter-on-quarter in the Q2 was entirely dependent on the services sector. Specifically, the preliminary GDP estimate shows that services sector output expanded 0.5% q/q in Q2 while industrial production contracted 0.4% q/q and construction output declined 0.9% q/q.

“However, while services output growth of 0.5% q/q in Q2 was up from expansion of just 0.1% in Q1 of 2017, it was still below the growth rates seen during the majority of 2016.”

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