Services sector growth signals rebound for UK economy

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Activity in the services sector has shown the fastest growth for eight months, indicating that the UK economy has rebounded after a sluggish start to the year.

The closely watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 55.1 in June, up from 54 in May.

A reading above 50 indicates growth.

This was the strongest rise in activity for the services sector since October, with survey respondents saying there had been an upturn in demand for business and financial services.

The survey indicated that the UK economy probably grew by 0.4% in the second quarter, up from 0.2% in the first quarter.

Following the news, sterling turned positive, and was up 0.13% against the US dollar at 1.320.

The report said the rise in activity was driven by strongest increase in new work since May 2017.

Chris Williamson, chief business economist at IHS Markit, said: “Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher.”

The report comes after data showed that activity in the manufacturing sector edged up in June, while construction activity hit a seven-month high.

Strong demand in the services sector led to the highest increase in work backlogs for three years.

Job creation in the sector remained modest, which the report said was due to problems recruiting staff, while some firms also cut jobs to save on costs.

“While survey respondents mainly commented on efforts to boost business capacity, there were also some reports that tight labour market conditions and squeezed margins had led to the non-replacement of voluntary leavers,” the report said.

Howard Archer, chief economist at EY Item Club, said the data showed the economy was “warming up”.

“A significantly improved survey for the dominant services sector adds to the feelgood factor after England actually winning a penalty shootout to reach the quarter-finals of the World Cup,” he said.

“The improved services survey completes an overall stronger set of purchasing managers’ surveys pointing to the economy warming up in June.”

He said the Bank of England was likely to be satisfied with the improved data, and that it supported the view that the Monetary Policy Committee would vote to increase rates next month.

The Bank backed away from a widely expected rate hike in May after the sharp slowdown in the first quarter, saying more data was needed to inform a decision on rates.

However, the Bank continues to expect the economy to bounce back in the second quarter after a weather-hit start to the year, when growth slowed sharply to 0.1%.

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