Services sector grew in July despite Brexit vote
The UK’s dominant services sector grew strongly in July according to the latest official data, confirming the impression that the economy has so far successfully brushed off the impact of the Brexit vote. Services account for almost 80 per cent of UK output and the ONS said the sector grew 0.4 per cent between June and July in the wake of the 23 June vote, well ahead of the expectations of City of London analysts of 0.1 per cent growth.
This was the first tranche of “hard” data on the UK’s most important sector and had been much anticipated
by economists. “This fresh data tends to support the view that there has been no sign of an immediate shock to the economy, although the full picture will continue to emerge,” said Darren Morgan of the ONS.
GDP growth in the three months to June was also revised up, with the ONS seeing it rising 0.7 per cent, better than the 0.6 per cent previously estimated. The upgrade reflected business investment coming in stronger than previously estimated, growing by 1 per cent in the quarter rather than 0.5 per cent.
The output growth of the services industry in the quarter was also revised up to 0.6 per cent from 0.5 per cent previously. The news lifted the pound up against the dollar to $1.2990 and against the euro to €1.1612, although those gains rapidly melted away. Financial traders have been lowering the expectations of another interest rate cut by the Bank of England later this year as forward-looking survey data has come in considerably better than expected.
Yesterday’s strong post-referendum services data is likely to reinforce that trend. “The jump in services output in July is the clearest sign yet that the Brexit vote has not pushed the economy into a recession,” said Samuel Tombs of Pantheon Macroeconomics. The Bank of England’s latest forecast for GDP in the third quarter of the year is 0.3 per cent. A number of City analysts have been revising away their expectations of a recession.
The strength of services looks set to continue, with the latest consumer confidence reading from GfK published yesterday showing that confidence in September was back up to where it was immediately before the referendum, having seen a sharp dip in July. The biggest contribution to the growth of services in July came from transport, storage and communication (up 1.6 per cent), followed by business services and finance (up 0.3 per cent).
The Chancellor Philip Hammond welcomed the latest batch of data, saying it showed “momentum” in the economy. “We want to build on this strength as we forge a new relationship with the EU and deliver an economy that works for all. The UK is well-positioned to deal with the challenges, and take advantage of the opportunities, that lie ahead,” he said.
In separate official data, the current account deficit came in at £28bn for the second quarter, better than the £30.5bn City of London analysts had pencilled in but still equivalent to 5.9 per cent of GDP, up from 5.7 per cent in the first quarter.
“While the post-referendum slide in sterling should help to improve the UK’s external position in the coming months, the size of the UK’’s current account deficit means that the country will remain vulnerable to external shocks and changing market sentiment, and risks a further downgrade to our credit rating,” said Suren Thiru of the British Chambers of Commerce.