Growth forecasts rise as services improve at best rate in 16 years
UK SERVICES posted their strongest growth in over 16 years during October, with the economy’s biggest sector showing no signs of slowing down as the fourth quarter kicked off.
A major survey of firms revealed yesterday suggested that the economy could grow by as much as 1.3 per cent in the final three months of the year, beating the promising growth figures seen over the past six months.
The purchasing managers’ index (PMI) for the sector, compiled by Markit and the Chartered Institute of Purchasing and Supply, hit 62.5, soaring further above the neutral 50 level, and September’s 60.3 reading. Firms pointed to a rapidly improving labour market, with the jobs part of the index up for the 10th straight month.
Across the British economy as a whole, businesses are reporting the best employment climate that Markit has ever recorded.
The findings reinforce Monday’s prediction by the Institute of Chartered Accountants in England and Wales (ICAEW) and Grant Thornton, who also announced that they expect 1.3 per cent growth in the fourth quarter.
Colin Bermingham of BNP Paribas referred to a “blistering pace of expansion”, while Capital Economics’ Martin Beck added: “With activity in the economy accelerating and the recovery remaining broad-based, an improvement on the third quarter’s 0.8 per cent quarterly expansion would seem to be on the cards.”
Similarly strong surveys for manufacturing and construction indicate that the economy will likely keep growing in the fourth quarter.
On the back of such buoyant data, the pound rallied back above $1.604, up 0.49 per cent, where it held for most of the day.
With services making up the largest part of the economy by some distance, signs of a solid expansion are particularly welcome.
However, purchasing managers said that the orders portion of the index has been boosted particularly by heat in the housing market, where strong growth from the government’s Help to Buy mortgage scheme may be difficult to sustain.
Despite the positive outlook, Ian Kernohan of Royal London Asset Management remained cautious, adding that wages are yet to respond to the economy’s recent upturn: “An improvement in real incomes will depend on falling unemployment feeding through to higher wage growth.”
As the findings were released, the European Union more than doubled the UK’s growth forecast for this year, highlighting the unexpected way that the economy has bounced back. In the spring, the EU only expected the British economy to grow by 0.6 per cent, and now expects to see 1.3 per cent growth.
The forecast also slashed projections for UK unemployment, with the rate of joblessness expected to fall to 7.3 per cent in 2015, down from the 7.9 per cent predicted early this year.
According to the EU’s report, “the outlook is quite bright” for the UK, and the economy “has thus far exceeded expectations” through the year.
Some analysts are now predicting that the improvements to the economy could cause a problem for the Bank of England’s forward guidance policy, which is designed to keep interest rates low until unemployment falls to at least seven per cent.
Howard Archer, chief UK economist at IHS Global Insight, added: “The very strong purchasing managers surveys for October will highly likely fuel market belief that the Bank of England will be raising interest rates by early 2015.”
When the Bank originally laid out its forward guidance plan in August, it suggested that there would be no hike in interest rates until at least mid-2016, when it projected that unemployment would drop below its threshold.
However, with rapid improvements to the economic outlook, others now think that the Bank’s forecast was too pessimistic.
Ernst & Young Item Club’s Nida Ali commented: “We expect unemployment to move below seven per cent by mid-2015, a year ahead of the Bank of England’s current forecast.”
Next week, the Bank is due to release its November inflation report, during which it will make any revisions to its forecasts for prices, growth, and the rate of unemployment.