UK services sector growth reaches 16-year high

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The UK services sector, which accounts for around 75% of the UK’s economy, ended its strongest quarter in more than 16 years with a solid display of growth in September. The suggestion now is that the economy is approaching the same momentum it had pre-2008.

The latest batch of impressive figures came from the Markit/CIPS Purchasing Managers’ Index (PMI) for services, and saw that sector weigh 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.

When combined with the Markit/CIPS surveys of the country’s manufacturing and construction sectors, which were also released around the same time, the overall data points towards an economic growth of 1.2% from July-September – a rate of expansion Markit has not seen since late 2007.

And the outlook for the service sector continues to be 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.

And economists believe this performance within the service sector is giving the whole economy a lift.

“The UK service sector turned in another stellar performance in August, building on the growth momentum seen during July,” said Paul Smith, senior economist at research firm Markit. “Moreover, the sector’s recovery, which has been evident since the start of the year, has legs.”

Howard Archer, economist at IHS Global Insight, added: “Robust service sector activity played a key role in the UK’s developing recovery through the first half of the year, and the very strong purchasing managers’ survey for August suggests that the services sector is on course to make an even larger contribution to GDP growth in the third quarter.”

On top of this, Markit said that employment across the three sectors had recorded the fastest rise in six years last month. It also showed that backlogs of work are running at the highest level in more than 13 years and that these would continue to drive hiring for some time to come. Indeed, many service providers reported that the jump in new business in September was placing strain on existing resources.

However, despite this extra work, there has only been a small increase in employment. Of course, if growth continues at the present rate this is likely to change over the coming quarters.

“New orders and job creation across all sectors are now rising at the fastest rates for almost six years, led by the vast services economy, boding well for robust growth momentum to be sustained as we move into the second half of the year,” said Markit’s Chris Williamson.

Meanwhile, David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply (CIPS), said: “After nearly six lost years of economic output, the UK economy looks to have really found its feet.”

He added that the survey reflected the stability in the global economy, which the services sector was taking “full advantage of”.

“The industry sustained August’s impressive business growth, dipping only fractionally from a near seven-year high, and new orders have now been growing for nine months consecutively,” Noble added.

Although there is increasing optimism across the economy, the question remains as to whether this is enduring and sustainable growth.

Here the BBC’s economics editor Stephanie Flanders adds a cautionary note. “Unfortunately, the growth we’re seeing is still ‘the wrong kind’: that is to say, it’s still being driven almost entirely by spending by households, rather than investment by companies or net exports,” she explained. “That does not feel like a very solid basis for the recovery, when most people’s earnings are still falling, in real terms, and households are still sitting on a large amount of debt.”

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