Services sector up – but tough times ahead

Activity in the services sector unexpectedly gathered pace in October – but forecast for the rest of the year are weakening.

The figures are likely to support expectations that the Bank of England will vote not to inject more stimulus into the economy this week but leave that option open further down the line if the economy worsens.

The headline business activity index in the Markit/CIPS PMI index rose to 53.2 last month from 52.8 in September, the highest reading since June and confounding forecasts for a dip to 52.5.

The improvement was led by a rise in new business, although the expectations index fell a full point and the employment index slipped back below the 50-level that separates expansion from contraction as firms braced for tough conditions ahead.

"On both output and new orders measures, rates of expansion remain soft compared to long-run averages, as companies continue to digest the true effects on the economy of the coalition government's Comprehensive Spending Review," said Paul Smith, senior economist at Markit.

"The latest data therefore suggest that the sector is set to make a below-par contribution to GDP in the coming months."

Nonetheless, Bank policymakers are also likely to be concerned by news of growing inflation pressures in the services sector, with firms ramping up their prices at the fastest pace in two years in response to increases in energy and wage costs.

Wednesday's PMI data, which covers firms that make up around 40 per cent of GDP, came after an unexpectedly robust survey of manufacturing activity and surprisingly weak construction PMI data this week. On balance, the figures suggest Britain's economy made a solid start to the final quarter of this year.

However, the survey also showed that companies remain cautious about the outlook and want to see how the 80 billion pounds of spending cuts laid out by the government last month will affect people's spending decisions.

"A number of respondents reported the deferral of client spending, reflecting continued uncertainty over the impact of government spending cuts on the economy," Markit said.

"Such concerns again dominated service providers' expectations, with business confidence remaining historically subdued."