December 4, 2013 / 9:32 AM / 6 years ago

Britain's service sector grows again, but rapid pace eases

LONDON (Reuters) - Growth in Britain’s service sector slowed a little last month, a survey showed on Wednesday, breaking a run of positive data surprises but still providing a strong backdrop for the government’s budget update later this week.

Financial data company Markit said its UK services purchasing managers’ index eased to 60.0 in November from a 16-year high of 62.5 in October.

That was two points below the median forecast in a Reuters poll and a lower reading than any of the 24 analysts surveyed had predicted.

But it was still one of the highest readings over the past seven years.

“A correction appeared to be likely given the excessive jump in October,” said Peter Dixon, economist at Commerzbank. “The service sector may have lost a little bit of momentum but 60 is still a decent number. The economy still has momentum.”

Sterling weakened to $1.6326 after the PMI data, from $1.6355 beforehand.

While the services data fell short of expectations, the strength of manufacturing and construction surveys released earlier this week means Britain remains on track to register an acceleration in economic growth in the fourth quarter.

“Even though the currency sold off (on the services data), the figures still show the economy was going great guns in the fourth quarter,” said Philip Shaw, chief economist at Investec. “If you had suggested a PMI reading of 60 at the beginning of the year you’d have had your arm bitten off.”

Taking the indices for services, manufacturing and construction together, Markit predicts UK GDP growth will accelerate to more than 1.0 percent in the final three months of the year, from 0.8 percent quarter on quarter in the third quarter.


Chancellor George Osborne is expected to announce the biggest upgrade to official growth forecasts in a decade on Thursday when he makes a twice-yearly budget statement to parliament.

“The statement will be the first that (he) has enjoyed delivering given expected updates to growth and a downgrade of the public borrowing figures for the next few years,” said Shaw.

“Osborne is likely to say that the outlook looks better and government economic policies are working, but much work is still to be done.”

The unexpectedly strong economic rebound since his March budget may give Osborne scope to address rising living costs - a political flashpoint ahead of a national election in May 2015. But he is likely to stick to his austerity programme, the merit of which he believes is becoming increasingly apparent.

A laggard among the world’s industrialised nations until this year, Britain now has one of the fastest-growing economies with an annualised growth rate of more than 3 percent.

Dixon at Commerzbank expects the government’s Office for Budget Responsibility to raise its economic growth forecast for 2014 on Thursday to around 2.5 percent, from 1.8 percent.

But there remain some headwinds to the recovery. Wages are rising more slowly than inflation, the household sector is heavily indebted and firms remain reluctant to invest.

There are also signs that price pressures are starting to build - something that may worry the Bank of England which has pledged to keep interest rates at a record low until the recovery is assured.

Input-cost inflation hit a nine-month high and output prices rose at their fastest pace since May 2011.

A doorman works outside a hotel in central London September 5, 2011. REUTERS/Toby Melville

The employment component of Wednesday’s services sector survey slipped to 54.2 from 56.2, but the new business index remained close to October’s series high, offering hope that growth might pick up again in the coming months.

“Although signalling an easing in the rate of growth in November, the survey of the services economy continues to signal an impressively strong rate of expansion,” said Markit’s chief economist Chris Williamson.

The composite index gauging activity in both the manufacturing and services sectors slipped to 60.5 from October’s record high of 61.6.

Editing by Jeremy Gaunt

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