Service sector beats forecast with best data in six months

UK economy on track for 0.5 per cent Q4 growth But concern over dip in confidence among employers

The UK’S powerhouse services sector saw activity jump to its highest level for six months in October, boosting hopes of an improvement for the wider economy in the fourth quarter of the year.

The Markit/cips services purchasing managers’ index (PMI) reached 55.6 last month, up from 53.6 in September and above economists’ expectations of 53.2. A reading above 50 indicates growth.

Improved order books and buoyant demand from clients helped the sector post its fastest rise since April.

Taking together October’s PMI data for services, construction and manufacturing, the report said the UK economy was on track for a 0.5 per cent expansion in the final quarter this year.

It would prove a marginal lift on the third quarter when gross domestic product (GDP) unexpectedly expanded by 0.4 per cent.

Despite the positive figures, Chris Williamson, chief business economist at IHS Markit, said the latest update provided “mixed news”.

He said: “While an upturn in business activity growth adds some justification to the Bank of England’s decision to hike interest rates for the first time in a decade, a deeper dive into the numbers highlights the fragility of the economy and points to downside risks for the outlook.

“The data point to the economy growing at a quarterly rate of 0.5 per cent, representing an encouragingly solid start to the fourth quarter.

“However, a downturn in business optimism about the year ahead, fueled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned.”

Alongside the dip in confidence, employment was also shrouded in negativity, with the rate of jobs being created hitting a seven-month low in October.

However, input cost inflation dropped to its lowest level for a year, easing the financial pressure on firms.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “A weighted average of October’s manufacturing, construction and services PMIS is consistent with quarter-on-quarter GDP growth edging up to 0.5 per cent in Q4, from 0.4 per cent in Q3. This points to some upside risk to the MPC’S estimate in November’s Inflation Report that GDP will rise by 0.4 per cent.”

However, he cautioned that the PMIS have not proved particularly reliable at predicting GDP growth and do not cover the struggling retail sector.

businessdesk@scotsman.com