Services provide further boost to UK economy

The output of the UK’s dominant services sector, which accounts for more than three-quarters of the nation’s GDP, reached a 17-month high in December, according to the latest Markit/CIPS purchasing managers’ index (PMI) for services.Publication of the index coincided with a report showing that new car sales in the UK recorded levels during 2016, and came in the wake of the PMIs for both manufacturing and construction showing unexpectedly high growth last month.

‘Robust economic data’

“A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown,” said Chris Williamson, IHS Markit chief business economist. “The faster growth of services activity follows similar news of improvements in the manufacturing and construction sectors at the end of 2016.“At face value, this improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut, but policymakers are clearly concerned about the extent to which Brexit-related uncertainty could slow growth this year.” The services PMI stood at 56.2 in December, well ahead of analysts’ expectations and up from 55.2 in November. Driven by new business, the output over Q4 was at its highest quarterly level for the year.Dean Turner, UK economist at UBS Wealth Management, commented, “The robust nature of recent economic data has been supported by a number of factors, in particular the weaker pound, as well as looser monetary and fiscal policy.“As we move further into the year, our expectation is that these positive effects may begin to fade. Moreover, higher inflation is likely to erode household income growth which could dampen the up-to-now buoyant consumer.”

Sales of new cars booming

Meanwhile, the Society of Motor Manufacturers and Traders (SMMT) reported annual new car sales in the UK of 2.69 million during 2016, representing a record for the second year running.Mike Hawes, SMMT chief executive, attributed the record to “very strong” consumer confidence, low-interest finance packages, and the introduction of new, high-tech models.“People are obviously driven by new technologies,” he said. “Increasingly, people do want to see connectivity. People are wedded to mobile phones. They expect equally to have that connectivity on the move.”But Mr Hawes said that registrations were likely to decline by between 5 and 6 per cent this year, though he added that this still represented “historically, an incredibly high level”.

Concerns over inflation

In a separate report, the British Chambers of Commerce (BCC) said that the UK’s services and manufacturing sectors would support modest economic growth in 2017, despite pressure on import costs as a result of the fall in the value of sterling.Dr Adam Marshall, director-general of the BCC, warned that many businesses remained concerned over rising inflation. “Both manufacturing and services firms say they are under pressure, particularly from the rising cost of inputs, which is squeezing margins and may weaken future investment. “Overall, our findings suggest growth will continue in 2017, albeit at a more modest pace.”Suren Thiru, head of economics at the BCC, added, “There is further evidence that rising prices will be a key challenge to the outlook for the UK economy over the next year, with the significant rise in the cost of raw materials increasing the pressure on firms to raise prices in the coming months.“While growth is likely to have remained on trend in the quarter, the UK’s growth prospects in the near-term are expected to be more subdued, weighed down by rising inflation and the uncertainty surrounding Brexit.”The BCC quarterly report was based on responses from 7,250 businesses.In the Winter 2016/17 issue of Relocate magazine, David Sapsted looks at some of the key international locations bidding for a piece of the post-Brexit action, and canvasses the views of business leaders and politicians. 

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