October 3, 2013 / 10:59 AM / 6 years ago

Service sector third-quarter growth strongest in 16 years - PMI

LONDON (Reuters) - Britain’s huge service sector rounded off its strongest quarter in more than 16 years with solid growth in September, suggesting the economy is approaching the momentum of pre-crisis days.

Visitors admire St.Paul's Cathedral from the restaurant floor of the Tate Modern gallery in London March 15, 2007. REUTERS/Alessia Pierdomenico

The main Markit/CIPS Purchasing Managers’ Index (PMI) for services, which make up more than three-quarters of the economy, came in at 60.3 last month, just off August’s near-seven-year high of 60.5 and far above the 50 level that indicates no change in activity.

Combined with surveys of British manufacturing and construction earlier this week, the data imply the economy grew 1.2 percent in the July-September period, Markit said - a rate of expansion not seen since late 2007.

Employment, which is watched closely by the Bank of England as the key indicator in its new policy of guidance on interest rates, grew in all three sectors.

The pound rose to near a nine-month high against the dollar, and prices of low-risk British government bonds fell further after the release.

“There is no mistake the economy is growing jolly fast,” said David Tinsley, an economist at BNP Paribas.

A recovery in the housing market was one of the main drivers of growth in the service sector while consumer services continued to struggle, Markit noted.

Data from mortgage lender Halifax showed earlier on Thursday that British house prices are rising at the fastest annual rate in more than three years, helped by a healing economy and government lending schemes.

Halifax noted signs that housing supply was beginning to pick up as well, with more homeowners putting their properties up for sale and house building on the rise.


The outlook for the service sector is also bright. Around half of firms polled last month expected even brisker trade in a year’s time, with the confidence index rising to 71.8.

Over the third quarter as a whole, the headline services index - measuring the change in activity, including income and chargeable hours worked, from the previous month - averaged its highest level since the second quarter of 1997.

Service providers reported that a jump in new business in September placed strain on resources, with backlogs of work rising at the fastest pace in more than 13 years.

Markit’s composite index, which brings together surveys of services, manufacturing and construction, averaged 60.2 over the third quarter - the best reading since records began in 1998.

Economists are now pencilling in a rise of around 1 percent in Britain’s gross domestic product in the quarter, although some caution that growth may subside next year.

The momentum is also feeding through to jobs.

Employment across the three sectors recorded the fastest rise in six years in September, Markit said, forecasting that backlogs of work would continue to drive hiring.

This contrasts with the Bank of England’s view that substantial spare capacity in the economy will put a brake on job creation, delaying a rise in interest rates.

The central bank said in August that it would not consider raising borrowing costs before unemployment falls to 7 percent, something it expects to take at least three years.

Editing by Hugh Lawson

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