UK services growth accelerates, improving odds on August rate hike
Activity in the UK dominant services industry improved much more than expected last month, suggesting the British economy grew 0.4% in the second quarter of the year and raising the chances that the Bank of England will hike interest rates in August.
The UK services purchasing managers’ index from IHS Markit/CIPS increased to 55.1 in June, the most positive growth sentiment since October and up from 54.0 in May, the level at which economists expected it to remain.
The services PMIs in the second quarter also points to quarterly growth in services output of around 0.5%, up from the first quarter’s 0.3% rate. The survey’s forward-looking balances also indicated that solid growth in the services sector should be sustained in the coming months.
With Wednesday's services PMI following better-then-forecast surveys from the manufacturing and construction sectors in preceding days, this meant the composite PMI for June rose to 55.2 from 54.5. The weighted-average of manufacturing, construction and services PMIs suggests second-quarter growth in UK gross domestic product has accelerated to 0.4% from 0.2% in the first, in line with the BoE’s forecast.
Services companies reported a general upturn in client demand, Markit said, particularly for business and financial services, with good weather said to have boosted consumer spending. Levels of new work grew at the strongest rate since May last year.
On the downside, the sector faced the steepest rise in average costs since last September, as some firms said they found it difficult to cut costs, with job creation remaining modest as firms found it hard to recruit staff.
The rise in the services PMI took the balance well above its first quarter average of 53.1, noted Capital Economics, suggesting the survey "provides further reassurance that the slowdown in GDP growth in Q1 was temporary and raises the chances that the MPC will vote to hike interest rates in August".
Economist Ruth Gregory said that if anything the surveys might be understating growth since the service sector PMI does not account for activity on the high street, which has rebounded strongly in the second quarter so far. "Overall, then, the figures provide reassurance that services – and overall economic – growth has picked up some pace in the second quarter. As things stand, we remain comfortable in our view that interest rates will rise at the MPC’s next meeting on 2nd August."
Sam Tombs at Pantheon Macroeconomics said the net contribution to GDP growth from the retail sector and the energy supply sector are only likely to amount to a mere 0.05 percentage points of GDP, and the PMI surveys are not a fully reliable indicator for the official activity data that will ultimately determine the Monetary Policy Committee’s next step.
"Official data show that economy-wide output was only 0.1% above its Q1 average in April, highlighting downside risk to the MPC’s forecast. As a result, it would be premature to conclude that an August rate hike is likely until the first monthly estimate of GDP for May is published next week."