Services Sector Rise Puts UK Economy On Track For 0.5% Growth In Fourth Quarter

The UK economy looks set to pick up pace in the fourth quarter after services sector activity accelerated to a six-month high in October.

The Markit/CIPS services purchasing managers’ index (PMI) hit 55.6 last month, up from 53.6 in September and above economists’ expectations of 53.2.

A reading above 50 indicates growth.

Brighter order books and robust demand from clients helped the powerhouse industry shrug off a spate of lacklustre performances to notch up its fastest rise since April.

Taking together October’s PMI data for services, construction and manufacturing, the report said the UK economy was on track for a 0.5% expansion in the final quarter this year.

It would prove a marginal lift on the third quarter when gross domestic product (GDP) unexpectedly expanded by 0.4% for the period.

Despite the positive display, Chris Williamson, chief business economist at IHS Markit, said the data provided “mixed news”.

He said: “While an upturn in business activity growth adds some justification to the Bank of England’s decision to hike interest rates for the first time in a decade, a deeper dive into the numbers highlights the fragility of the economy and points to downside risks for the outlook.

“The good news was that October saw business activity across services, manufacturing and construction grow at its fastest rate for six months.

“The data point to the economy growing at a quarterly rate of 0.5%, representing an encouragingly solid start to the fourth quarter.

“However, a downturn in business optimism about the year ahead, fueled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned.”

Alongside the dip in confidence, employment was also shrouded in negativity, with the rate of jobs being created hitting a seven-month low in October.

However, input cost inflation dropped to its lowest level for a year, easing the financial pressure on firms.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “A weighted average of October’s manufacturing, construction and services PMIs is consistent with quarter-on-quarter GDP growth edging up to 0.5% in Q4, from 0.4% in Q3.

“This points to some upside risk to the MPC’s estimate in November’s Inflation Report that GDP will rise by 0.4%.

“Remember, however, that the PMIs are not particularly reliable—the average error at predicting GDP growth over the last two decades has been 0.3pp—and they do not cover the retail sector, which is struggling.”

The Bank of England hiked interest rates for the first time in more than 10 years on Thursday and signalled more “gradual” increases are on the way to cool surging inflation.

The Bank’s nine-strong Monetary Policy Committee (MPC) voted 7-2 to raise rates from 0.25% to 0.5%, which marks the first increase since July 2007.