Britain’s services sector grew at the fastest pace for 17 months in December, according to a survey that has raised hopes for a strong end to 2016 for the economy.
There was also a pick-up in new business and job creation, according to the poll of firms from the UK’s biggest sector, which includes banks, hotels and transport. But news that companies increased their prices at the fastest pace for more than five years will intensify worries over the weak pound stoking inflation in the months ahead and raises the prospect of interest rates going up this year.
The main reading on the closely watched Markit/CIPS UK Services PMI (pdf) confounded economists’ expectations of a slowdown. It increased for the third month running to 56.2 from 55.2 in November and signalled the fastest growth for the dominant services sector since July 2015. Economists had forecast 54.7 in a Reuters poll.
It was the fifth month running that the index was above the 50 mark, which separates growth from contraction, having briefly plunged below it in the wake of June’s referendum on EU membership.
The report follows stronger-than-expected surveys from the smaller manufacturing and construction sectors this week. The polls’ compilers said that taken together they point to the economy growing 0.5% in the final quarter of 2016, only a slight slowdown from 0.6% in the third quarter and confounding forecasters who had predicted growth would grind to a halt before the end of the year because of Brexit worries.
“A buoyant service sector adds to signs that the UK economy continues to defy widely held expectations of a Brexit-driven slowdown,” said Chris Williamson, chief business economist at IHS Markit.
He said that, with the all-sector PMI now at a 17-month high and signs of costs pressures, talk of an interest rate hike was likely to grow.
The Bank of England cut official interest rates to a record low of 0.25% after the Brexit vote as part of a package of measures to shore up confidence and keep businesses and consumers spending. Since then policymakers have highlighted they face a trade-off between keeping inflation in check and supporting the jobs market and wider economy.
Williamson added: “At face value, this improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut, but policymakers are clearly concerned about the extent to which Brexit- related uncertainty could slow growth this year.
“They will therefore consider the current resilience of the economy alongside the elevated levels of uncertainty highlighted by the historical weakness of business optimism about the year ahead. Any change in policy therefore looks unlikely in the short-term, and the next move in policy could as much be a rate cut as a hike.”
The report signalled that new business increased at the fastest rate since July 2015, with companies linking the improvement to a range of factors, including new product launches, government contracts and export business.
Employment growth continued for the fifth month running in December, with the rate of job creation unchanged from November’s seven-month high. Markit said the jobs reading was stronger than the long-run survey average but that employment growth over 2016 as a whole was weaker than the trends shown in 2013, 2014 and 2015.
Cost pressures remained “elevated”, the report said. Companies’ costs, or input prices, rose at the second-fastest rate since April 2011, linked to the weak pound, which has made imports to the UK more expensive.
“Higher food and fuel prices were widely mentioned, while labour, IT and oil-based items such as packaging were also cited as being up in price,” the PMI report said.
As a result, services companies raised their own charges at the fastest rate since April 2011. The survey covers a large part of the services sector, but not retailers.
Those rising prices could soon squeeze consumer spending, economists warned.
Scott Bowman at the consultancy Capital Economics said: “A moderation in growth in 2017 seems likely as rising inflation eats into households’ real income growth.
“Nonetheless, the support provided to activity from a lower pound and rock-bottom interest rates should prevent growth from slowing too sharply. Overall, our forecast is for GDP growth to ease from around 2.0% in 2016 to about 1.5% in 2017.”
The PMI reports chime with a modestly upbeat tone in the latest survey from the British Chambers of Commerce. That suggested firms had enjoyed increases in export sales and orders but showed they were worried that rising import prices would slow growth this year.
Alan Clarke at the Scotiabank in London said the less timely official data would now be key to confirming the message from the surveys.
“Brexit clearly hasn’t hurt business sentiment. The acid test is whether this feeds into the hard data,” he said.
This article was written by Katie Allen, for theguardian.com on Thursday 5th January 2017 10.56 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010