U.K. Services Growth Surges in Sign of Unbalanced Recovery

By Scott Hamilton

Photographer: Simon Dawson/Bloomberg

U.K. services growth unexpectedly accelerated in August.

U.K. services growth unexpectedly accelerated in August, countering a slowdown in manufacturing and reinforcing the recovery’s dependence on domestic demand.
Markit Economics’ Purchasing Managers’ Index rose to a 10-month high of 60.5 from 59.1 in July. Economists had forecast a decline to 58.5, based on the median estimate in a Bloomberg News survey. Markit said the gauge, along with its factory and construction surveys, indicate the economy will grow about 0.8 percent this quarter, in line with the previous three months.
Coupled with an increase in construction activity, the
services report highlights the unbalanced nature of the recovery. Manufacturing and exports are under pressure from a stagnant euro-area economy and tensions related to the conflict in Ukraine. Uneven growth may help Bank of England Governor Mark Carney press his case to keep record low interest rates when policy makers begin their two-day meeting today.
“The worry is that growth remains too dependent on the domestic economy, raising the risk that higher interest rates will derail the upturn,” said Chris Williamson, chief economist at Markit in London. “Any hopes of a rebalancing towards exports have been dealt a blow by the escalating Ukraine crisis.”
The pound rose against the dollar after the report and was trading at $1.6489 as of 10:05 a.m. London time, up 0.1 percent on the day. The yield on the 10-year U.K. government bond rose 5 basis points to 2.49 percent.

Factory Slowdown

The BOE will keep its benchmark interest rate at 0.5 percent tomorrow, according to all 49 economists in a Bloomberg survey. While two of the central bank’s nine policy makers wanted to increase the key rate last month, Carney has cited global threats as one reason not to begin reducing stimulus.
In its manufacturing report on Sept. 1, Markit said the drop in the factory index to the lowest in more than a year showed that U.K. industry “is not immune to the impacts of rising geopolitical and global market uncertainty.”
While services have been expanding for 20 straight months, there were signs of weakness in today’s report, with an index of new business falling to a three-month low of 58.8 from 60.2. The pace of hiring slowing and confidence dropped to the lowest in 15 months.
“Dovish policy makers will worry that the Ukraine crisis will also filter through to a significant slowdown in services and construction,” Williamson said. “Some impact is already evident, with growth of new orders and employment moderating in all three sectors in August.”