UK services growth unexpectedly jumps as economy gathers pace

The UK’s dominant services sector grew at the fastest pace in eight months in June, driving a bounce back in the economy and boosting the case for a Bank of England (BoE) rate increase as soon as next month.

IHS Markit’s Purchasing Managers Index for the industry climbed to 55.1 last month, up from 54 in May and beating economists’ estimates for no change.

The report, which follows surveys earlier this week showing faster growth in the nation’s manufacturing and construction sectors, suggests the UK’s growth rate doubled to 0.4% in the second quarter, Markit said.

That backs up the argument of BoE officials who say that the economy is rebounding after a weather-hit first quarter - a case that may be further strengthened by evidence from the survey showing that input costs also spiked in June. Markit predicts that will cause UK inflation, already above the BoE’s target, to climb from its current level of 2.4%.

The pound erased a 0.2% slide after the report to trade little changed at $1.3201 as of 10:45.

“Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher,” said Chris Williamson, chief business economist at Markit.

The survey Wednesday also showed the fastest pick up in new work in 13 months, an upturn in demand for business and financial services, and evidence that the sunny weather last month boosted consumer spending.

Still, even with growth gaining momentum, there remain signs that Brexit-related uncertainty is continuing to hold back investment, Markit said.

“It remains encouraging yet also surprising that current business activity continues to show such resilience amid relatively moribund confidence,” Williamson said.

“Such a divergence between current and expected future activity stokes worries that the upturn is being fuelled by short-term spending, based on hopes that uncertainty will lift, and likely masks a lack of longer-term business investment.”

This week’s reports are the last full set of PMI readings BOE policy makers will get before they announce their next decision on August 2. Officials voted 6-3 to hold rates at their June meeting, and investors are currently pricing in about a 65% chance of rate increase next month.