News Column

REPEAT: UPDATE: British Service Sector Growth At 8-Month High

August 5, 2014

LONDON (Alliance News) - UK services activity growth strengthened to an eight-month high in July indicating that the dominant sector is set to boost economic growth again in the third quarter and raises possibilities that the Bank of England will bring forward its first interest rate hike into late 2014.

The headline Chartered Institute of Purchasing & Supply/Markit Purchasing Managers' Index rose to 59.1 in July, an eight-month high, from 57.7 in June, survey data revealed Tuesday.

The index has remained above the 50 no-change mark for over a year-and-a-half and well above the expected score of 58.

"The survey data point to the growing likelihood of yet another strong economic expansion in the third quarter," said, Chris Williamson, chief economist at Markit.

"We would expect to see GDP rise by 0.8% again if the surveys hold their current levels."

A positive business environment boosted demand in July. The launch of new services, increased marketing and greater opportunities to tender for business supported activity growth.

Demand from both at home and abroad reportedly strengthened. With workloads rising, services employment increased at a historically marked rate.

The upward trend in hiring was extended into the second half of the year as staff were recruited in anticipation of further demand growth in months ahead.

Indicating capacity pressures, backlogs of work rose at a marked and accelerated pace during July. Business outstanding has now increased for sixteen months in a row.

However, the degree of positive sentiment among service providers was the lowest for eight months.

James Knightley, an ING Bank NV economist said it was no real surprise given the pace of recent expansion and the fact that sterling strength and the prospect of interest rate hikes are potential headwinds.

However, the PMI survey on the manufacturing sector signaled the weakest growth in a year in July, last week. The index fell to 55.4 in July from 57.2 in June. Meanwhile, construction activity grew at the fastest pace since 2007 in July led by increased house building work.

The central bank underestimates the slack in the UK economy, David Blanchflower, a former BoE policymaker said in an article for the National Institute of Economic and Social Research, today.

According to a paper co-authored by Blanchflower and David Bell, a professor at the University of Stirling, policymakers have made arbitrary downward adjustments to labor market slack.

They argued that these adjustments are inappropriate as the UK labor market is much further from full employment than the Monetary Policy Committee calculates. Therefore, there is much less pressure on wages than the BoE forecast.

The central bank estimates spare capacity in the range of 1-1.5% of output. The next quarterly report elaborating bank's assessment will be released on August 13.

The NIESR today said the UK economic growth is getting entrenched and the GDP growth is expected to accelerate to 3% in 2014.

The think tank said that the labor market is continuing its strong growth. Job creation is expected to improve further and unemployment is estimated to fall below 6% later this year.

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Source: Alliance News

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