Services bounce-back boosts UK economy

5 March 2018, 13:54

Britain's dominant services sector has bounced back to keep UK growth on track as it recorded its best performance in four months.

Figures for February from the sector - which covers businesses from law firms and accountants to bars and restaurants - suggested that the wider economy had maintained the 0.4% pace of expansion seen in the final quarter of 2017.

However experts noted that for the first quarter as a whole, GDP growth was likely to take a knock as a result of the cold snap causing some activity to freeze up - if only temporarily.

The services Purchasing Managers' Index (PMI) recorded a better than expected figure of 54.5 in February, up from 53 the month before. A figure of 50 separates growth from contraction.

There was strong job creation and an upturn in new orders - which, for a sector representing four-fifths of UK output, might be seen as strengthening the hand of Bank of England rate-setters considering a hike in May.

But there were also signs that pressures driving up prices had cooled a little, dampening the argument that an interest rate rise might be needed to curb inflation.

Taken together with the PMI figures from manufacturing and construction the latest data suggested that "a resiliently steady pace of expansion has been maintained" according to Chris Williamson, chief business economist at IHS Markit, which compiles the survey.

He said that it left the possibility of a May rate hike "very much in play".

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the case for leaving rates on hold in May remained strong.

He said weighted figures actually painted a picture of growth slowing to 0.3% in the first quarter while inflation remained subdued.

HSBC economist Elizabeth Martins said the survey data pre-dated the recent weather disruption in late February and early March "so there may be an impact not yet showing through".

But she added that this would be "circumstantial rather than indicative of an underlying slowdown".

The PMI data also showed the services sector - in recent years the engine of UK growth - reasserting itself as the strongest expanding part of the economy after a Brexit slowdown.

Since the referendum in 2016, the sector has been hit by the tough environment for consumers, as the collapse in the pound has driven up prices.

At the same time, the pound's weakness has helped exports become more attractive for overseas buyers, boosting manufacturing.

But more recently, the pound has recovered close to levels seen before the referendum, partly reversing the effect in last month's data.

However, a separate survey on Monday from manufacturing organisation EEF showed that the sector had cooled only slightly from last year's heights, helped by strong global demand.