Hope of GDP boost after key services sector bounceback

● Latest PMI data suggests Q2 growth of up to 0.4% and possible interest rate rise

Britain’s economy is on course to rebound from a snow-hit start to 2018 after activity in the dominant services sector hit a three-month high in May.

The Markit/cips services purchasing managers’ index (PMI) showed a reading of 54 last month, up from 52.8 in April. A reading above 50 indicates growth.

The latest figure is the highest since February and comes after firms in the services sector enjoyed a bounceback after the “Beast from the East” extreme weather disruption in the first quarter, according to the survey.

Markit said the services data suggests the economy is set to grow by between 0.3 per cent and 0.4 per cent in the second quarter, up from 0.1 per cent in the first three months.

But the survey also revealed ongoing uncertainties over Brexit, which is weighing on new work orders and conficonfidence dence among firms in the servicessector,whichaccountsfor around three-quarters of GDP in the UK. The data follows PMI readings from the manufacturing and construction sectors for May, which showed a slight increase to 54.4 and unchanged reading of 52.5 respectively.

Chris Williamson, chief business economist at survey compiler IHS Markit, said: “The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but, like the earlier manufacturing and construction surveys, raises questions about the outlook.”

The study showed the latest increase in new work received by service sector firms was still one of the weakest seen since the summer of 2016.

It found that firms in the sector – ranging from retailers to restaurants – believed subdued consumer spending and Brexit-related concerns among large corporate clients had weighed on new business growth in May.

The survey also saw business across the sector ease back for the third time in the past four months, with Brexit worries remaining a top concern, as well as lacklustre consumer demand.

The data fuelled expectations for the Bank of England to rekindle its plans to hike interest rates. James Knightley, chief international economist at ING, said the figures boost the case for a rate hike from 0.5 per cent to 0.75 per cent. But if approved, “we doubt it will be followed quickly with additional hikes given the economic threats from rising fuel costs, stagnant real wages, Brexit uncertainty and a reluctance amongst firms to invest in the UK”.

Williamson said that with forward-looking indicators “suggesting that the economy could relapse, a rate rise is by no means assured”.

Howard Archer, chief economic advisor at the EY ITEM Club, said: “The jury will likely remain out on the prospects for an August interest-rate hike given that the monetary policy committee wants to see sustained evidence that the economy is improving before tightening monetary policy.”