The dominant UK services sector reaches 17-month high in December as domestic demand increases strongly

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The services sector makes up almost 80 per cent of the UK economy (Source: Getty)

Economic activity in the UK’s dominant services sector ended 2016 on strong form to reach a 17-month high, according to an important indicator.

The services purchasing managers’ index (PMI) rose beyond expectations for the third month in a row to 56.2 compared to a 55.2 reading the month before, according to IHS Markit.

This is well above the six-month trend of 53.1, as well as the 20-year average. A reading above 50 indicates expansion in the services economy.

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New business growth drove much of the expansion with the highest reading in a year and a half, while rates of employment remained above the long-run average.

However, the PMI survey also found input prices rising for services firms at the second-fastest rate for more than five years. Service providers raised their own prices in response.

The services sector comprises almost 80 per cent of the UK economy, making its performance integral to the economic health of the nation.

Activity in the services sector has trended downwards from its 2013 peak. However, in recent months it has recovered significantly after a contraction in the wake of June’s EU referendum and the subsequent resignation of former Prime Minister David Cameron.

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Christopher Williamson, chief business economist at IHS Markit, said “The strengthening of demand helped improve the business mood, with optimism about the year ahead perking up to the second-highest since June’s Brexit vote in both the construction and service sectors.

“On the other hand, the overall level of optimism remained low by historical standards, primarily reflecting widespread concern about the extent to which Brexit may affect business conditions over the course of the coming year,” he added.

There are also concerns on the horizon for the services sector as inflation starts to feed through to consumer activity. Factory gate prices have increased strongly since the devaluation of sterling after the EU referendum, with economists predicting significant rises for consumer prices to come.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The services sector still looks vulnerable to slowing this year as sterling’s depreciation and higher oil prices begin to erode households’ purchasing power."

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