UK Economy To Accelerate After Robust Services Sector Activity

UK Economy To Accelerate After Robust Services Sector Activity

The UK economy is set to accelerate in the fourth quarter of 2017 after output in the powerhouse services sector chalked up a better-than-expected performance last month.

The IHS Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 54.2 in December, up from 53.8 in November, with economists pencilling in a figure of 54.

A reading above 50 indicates growth.

Chris Williamson, IHS Markit’s chief business economist, said the robust result could help the UK economy achieve 0.5% growth in the final three months of last year, up from 0.4% in the third quarter.

Services industry activity recorded its second-fastest rise since April in December, but new business volumes slowed in the face of “subdued business investment and costs consciousness among clients”.

The update follows a mixed performance from other areas of the economy last month, with the UK manufacturing industry churning out “solid growth” and construction output unexpectedly falling.

Mr Williamson said: “December saw a welcome upturn in service sector activity, highlighting the continued resilience of the economy as 2017 came to an end.

“Alongside the solid expansion seen in manufacturing and modest construction sector upturn, the survey data are consistent with the economy having grown 0.4% to 0.5% in the fourth quarter of 2017.

“However, as has been increasingly the case in recent months, the good news comes with a health warning about the sustainability of the upturn.

“Digging into the details behind the resilient strength signalled by the headline numbers, the survey data reveal an economy that is beset with uncertainty about the outlook, which is in turn dampening business spending and investment.”

The rise in activity came despite firms grappling with Brexit-induced cost pressures, with operating expenses rising at the fastest pace for three months.

However, companies were less gloomy about Brexit uncertainty for the year ahead, with optimism reaching a seven-month high in December as more businesses eye a potential rise in activity.

Alan Clarke, Scotiabank’s head of European Fixed Income Strategy, said the services performance pointed to a more modest 0.4% rise in fourth-quarter economic growth.

The Office for National Statistics (ONS) confirmed last month that gross domestic product (GDP) grew by 0.4% in its final reading for July to September this year, rising from 0.3% in the first and second quarters.

However, the UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 – when GDP rose by 0.6%.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the December services performance suggested the sector was still “struggling for momentum”.

He said: “The business activity index recovered in December, but only to its 2017 average. In addition, new orders increased at the slowest rate since August 2016 and employment growth eased to a nine-month low.

“A weighted average of the manufacturing, construction and services PMIs in Q4 is consistent with GDP rising by 0.4% quarter-on-quarter – the same as in Q3 – but official data for October suggest that a slightly weaker result is likely.”

Sterling was up 0.2% against the US dollar at 1.354 following the announcement, with the pound drifting marginally lower versus the euro at 1.124.


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