Britain's services sector grows at fastest pace for 16 years

Services sector grew at fastest pace for 16 years in third quarter of the year, fuelling hopes that economy will have performed better than already-buoyant expectations

SMEs in the North East fear the economy will take years to recover
Fuel inflation and some rising wages saw operating costs continue to soar, with companies unable to pass them on because of price competition

Britain's dominant services sector grew at its fastest pace for 16 years in the third quarter of the year, fuelling hopes that the overall economy will have performed better than already-buoyant expectations.

The closely watched Markit/CIPS purchasing managers’ index (PMI) showed that activity in the sector - which accounts for three-quarters of UK output - increased at the highest rate since the second quarter of 1997 from June to September.

Combined with strong performance from other sectors this week, economists said it suggested growth for the period of around 1.2% - a level not reached since the third quarter of 2007.

It would represent a sharp improvement on the 0.7% growth in the second quarter of this year. Official data for the third quarter will be published later this month.

A headline reading for September of 60.3 for services – where 50 separates growth from contraction – was a slight fall on August’s seven-year high of 60.5 and follows a slight slowing in expansion also recorded for manufacturing and construction.

The services sector figures showed that increases in activity and new business saw a return to solid employment growth after a slowdown in August, after the upturn meant increasing backlogs of work, prompting bosses to add to payrolls.

It means the sector has been growing continuously over nine months.

Firms reported improved business confidence leading to a greater willingness to commit to new contracts.

However fuel inflation and some rising wages saw operating costs continue to soar, with companies unable to pass them on because of price competition.

Vicky Redwood of Capital Economics said the figures were “more evidence that the recovery is becoming well-entrenched”.

She said that taken together the surveys from all three sectors suggested gross domestic product (GDP) growth of 1.3% in the third quarter, likely to be around 1.2% when other factors such as retail sales and industrial production were included.

However, official data, which has been a little less optimistic than the surveys, suggested this “might be a tall order”, she added, giving a forecast of 0.9%.

Chris Williamson, chief economist at survey compilers Markit, said growth in the services sector was being led by financial services - linked to increased housing market activity - and the business sector.

Meanwhile, consumer services continued to suffer amid the continuing squeeze on household incomes due to weak pay growth has been lagging behind inflation.

But Williamson was optimistic. He said: “There are encouraging signs that the strong pace of expansion will persist in the coming months.”

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