Britain’s services industry bounced back strongly last month from a slump triggered by June’s vote to leave the European Union, a closely watched survey showed yesterday, reducing the likelihood of a recession.
The survey echoed the upbeat tone of numbers released last week on the manufacturing and construction sectors in August.
Overall economic growth, however, still looks set to slow sharply, keeping alive the prospect of another Bank of England rate cut before the end of the year.
The Markit/CIPS Purchasing Managers’ Index (PMI) for the services sector jumped to 52.9 in August from July’s seven-year low of 47.4, the biggest one-month gain in the survey’s 20-year history and one which beat all forecasts in a Reuters poll.
The sterling rallied by almost half a cent to hit a seven-week high against the dollar, and British government bonds trimmed earlier gains.
“The survey data is very useful in giving us a feel for how the economy is doing in the short term but, in this case, I think it might pay to be a bit more cautious,” RBC economist Sam Hill said, adding the PMI data seemed volatile and he would look for official output data for July later this week.
Overall the figures suggested an imminent recession will be avoided
Last week, PMIs for the much smaller manufacturing and construction sectors showed similar gains to the services PMI, boosting August’s all-sector PMI to a five-month high of 53.2.
However, given the weakness in July, economic growth in the third quarter overall was likely to be just 0.1 per cent, survey compilers IHS Markit said.
“It remains too early to say whether August’s upturn is a dead cat bounce or the start of a sustained post-shock recovery,” IHS Markit economist Chris Williamson said. “But there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate.”
Overall, the figures suggested “an imminent recession will be avoided”, Williamson added.
A mild recession was the central forecast in a Reuters poll of economists conducted last month after the BoE cut rates for the first time since 2009 and restarted quantitative easing to help protect the economy from a Brexit shock.
The BoE did not forecast a recession and instead predicted growth of 0.1 per cent for the third quarter.
“Now that we’ve seen some resilience in the UK economy, many are questioning whether last month’s ... decision was the right one. We believe the Bank of England has taken the correct course of action and expect them to ease further before the year is out,” UBS Wealth Management economist Dean Turner said.
Britain’s new Finance Minister, Philip Hammond, will also pay close attention to the figures as he considers how decisively he will break with his predecessor’s austerity plans later this year.
Part of August’s gains were linked to the sterling’s slump against the dollar and the euro, with more demand for exports and a higher number of Britons holidaying at home.
Separate figures from the car industry showed sales up 3.3 per cent in August, driven by sales to company car fleets, after stagnation in July.
But the weaker pound also pushed up prices at the fastest rate in over two years while business confidence remained near its lowest in four years, despite some improvement from July.
“Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth,” Williamson said.
Prime Minister Theresa May has not decided when to start formal exit talks with the EU which are likely to lead to years of uncertainty about how much access British firms will retain to European markets.
A survey from the EEF manufacturers body showed the weakest outlook for investment since late 2009.
Markit’s services PMI only covers about half of the sector that makes up 80 per cent of Britain’s economy, as it does not include retailers or public services. (Reuters)