Soaring services sector drives business activity to record high

HOPES that the recovery is picking up steam were lifted further yesterday, after the UK’s businesses reported the strongest month of growth since records began.

Markit’s surveys of the services, manufacturing and construction sectors in July got the most positive responses ever, bolstering recent signs that the economy is returning to sustained expansion.

The unparalleled score – the highest since records began in 1998 – was triggered by a soaring response from the UK’s services sector, with the reading of 60.2 the highest since 2006. Any score above 50 indicates that the sector is improving.

Overall, the UK’s composite PMI now stands at a record 59.48.

Businesses also indicated that they have the strongest intentions to hire new employees since before the financial crisis, suggesting unemployment may begin to fall as the economy heats up.

After the figures were released, the pound rose against both the dollar and euro, by 0.39 per cent and 0.47 per cent respectively, ending the day at over $1.53 and €1.15.

And this morning the British Retail Consortium added to the upbeat atmosphere, as it revealed that July was the strongest month of sales growth since 2006. There was a 3.9 per cent spike in retail sales from a year ago, with online sales alone increasing by 7.9 per cent during the latest 12-month period.

RBC Capital Markets doubled its expectations for the third quarter’s GDP figures, raising its forecast from 0.5 per cent growth to one per cent, for July to September alone.

But despite saying that such a strong showing from the services sector could drag growth for those three months to as high as 1.5 per cent, Capital Economics analyst Martin Beck questioned if robust expansion could be sustained, given that households’ real incomes are still declining.

And while upgrading its predictions for economic growth last week, the National Institute of Economic and Social Research warned the recovery was prompted by rising consumer spending, coupled with less saving.

“A full and real recovery for many people will be one that results in meaningful job creation, a strengthening in real wages and an associated improvement in living standards which have been under substantial pressure in recent years, ” said Markit senior economist Paul Smith.

The rapid strengthening of economic indicators is likely to weigh heavily on the Bank of England’s monetary policy committee (MPC) as it finalises tomorrow’s inflation report. The update will come with recommendations to the chancellor for new tools for policy.

“If the recovery is associated with a pick-up in mortgage borrowing at low interest rates, households may become even more sensitive to eventual tightening,” said Deutsche Bank’s George Buckley, who also raised his prediction for growth this year from 1.1 per cent to 1.4 per cent.

Buckley added: “The combination of a recovering housing market and ultra-low interest rates could mean that stresses become more acute when policy needs to be tightened”.