UK services sector back to boom-time levels

Britain's powerhouse services sector has returned to boom-time levels with its fastest expansion in six-and-a-half years, a survey showed

Activity among firms hit its highest level since December 2006, with a reading of 60.2 in July, well above the 50 mark which separates growth from contraction, according to the Markit/CIPS services purchasing managers index (PMI).

Services, which account for more than three-quarters of the economy, drove the UK’s 0.6% gross domestic product growth in the second quarter to fuel hopes that Britain’s recovery is firmly on track.

The figures from the closely-watched PMI survey complete a hat-trick of robust data from the three main sectors of the economy, following growth by both the manufacturing and construction sectors in July.

It was the seventh consecutive month of expansion for services and built strongly on a reading of 56.9 in June. Services firms were boosted by better weather and improvement in the housing market.

Order backlogs surged at their sharpest rate since early 2000, and sales rose at their strongest level since November 2006, the survey showed. Employment increased and confidence about future activity hit its highest level in 15 months.

Paul Smith, senior economist at Markit, said while there were some reports that better weather bolstered activity in July, the sector appears to have ‘genuine momentum’, with a recovery becoming more ‘broad-based’.

He said: “The forward-looking elements from the survey point to a further strengthening of GDP in the third quarter as the UK heads towards self-sustaining economic expansion.”

Martin Beck, UK economist at Capital Economics, said: “A recovery in the dominant part of the economy looks increasingly entrenched.

“While temporary factors may have played a role in boosting activity, a turnaround in the economy’s fortunes seems to be in train.”

However, he added growth is unlikely to be sustained at this pace as wages fail to keep pace with inflation.

The figures are the latest in a string of upbeat signals, with consumer confidence gathering pace, and will ease pressure on the Bank of England to pump more money into the economy.

New Bank of England governor Mark Carney gives his first inflation report today and is expected to introduce a policy of forward guidance on economic stimulus – such as pinning interest rate rises to milestones such as unemployment.

ING Bank economist James Knightley said the data ‘adds to the evidence that the UK economy is gaining momentum and therefore there is little need for any further direct stimulus in the form of rate cuts or quantitative easing“.

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