UK services business activity bounces back in August

5th September 2016

The UK service sector rebounded back to growth in August, according to PMI survey data.

The Business Activity Index rebounded to 52.9 in August, from 47.4 in July, signalling a rise in UK services output. The month on month gain in the index, at 5.5 points, was the largest observed over the 20-year survey history, following a record drop of 4.9 points in July. The rate of expansion in the latest period was the fastest since May, but weaker than the long-run survey average.

Following abrupt contractions in output and new business in July linked to disruption related to the outcome of the EU referendum, the latest data signalled a return to growth as companies reported that uncertainty had abated somewhat.

The forward-looking business expectations index recovered most of the ground lost in July when confidence took a knock from the Brexit vote amid political and economic uncertainty, albeit remaining weak by historical standards.

The latest data also signalled rising inflationary pressure linked to the weak pound.

The renewed expansion of total activity was supported by a resumption of growth of new business in August. New work rose at the fastest pace in four months, having previously fallen at the strongest rate since March 2009 in July.

Companies linked greater demand to new clients, higher export business linked to the weak pound, higher domestic tourism and returning confidence following initial disruption related to the Brexit vote.

Adrian Lowcock, investment director at fund firm Architas, says: “Business confidence has rebounded strongly in the UK following the initial shock of the vote to leave the EU.  The figures follow on from strong manufacturing PMI figures last week. Both indicate the UK is moving from contraction into expansion. However, investors should be careful of reading too much into the confidence figures as they are likely to have overshot as businesses gave a sigh of relief that things did not turn out as bad as expected.

“The UK economy could be entering a bit of a sweet spot  as it benefits from the fall in the pound as well as the central banks  interest rate cut and quantitative easing.  At the same time the UK could remain in the single market until the end of the decade.  However, there are headwinds on the horizon for the UK economy, the consequence of a lower pound is rising prices; both input and output prices are at five year highs indicating inflation might pick up sharply which could restrict any improvement in the UK economy.”

“The effect of the Brexit vote on the UK economy is still unclear and the data has swung quite wildly from one extreme to the other. Whilst we believe a recession will be avoided there will be some winners and losers and with markets having rallied strongly since the vote, investors need to be diversified, not just across global equities but across different asset classes.”

The survey is conducted by IHS Markit and the Chartered Institute of Procurement & Supply.


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