Services PMI Beat will Ease Concerns of a Slowing UK Economy

UK economy

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- Service sector adding jobs at pace again

- Wage pressures growing

- Data suggests 2019 interest rate rise at BoE not out of question: ING

The UK's dominant services sector expanded in May, easing concerns that then economy was at risk of going into reverse after both the construction and manufacturing sectors shrank last month.

The IHS Markit Services PMI read at 51, ahead of analyst expectations for 50.6, which represents an increase on the previous month's reading of 50.4. A reading above 50 represents growth.

The services sector represents over 80% of UK economic activity and is therefore the most important economic survey for traders trying to get an early insight into where the economy is heading.

Both the Construction and Manufacturing PMI readings out earlier this week disappointed against economist expectations by delivering readings below 50.

The data suggests the UK economy has slowed down drastically ahead of the mid-year point, but the Services PMI reading should ease some of the concerns.

According to IHS Markit, the rate of expansion in the services sector edged up to a three-month high thanks to a modest rebound in new business and the fastest upturn in staffing levels since November 2018.

Higher payroll numbers were linked to long-term business expansion plans and efforts to boost operating capacity while higher staff wages and rising transport costs contributed to another strong rise in input prices.

According to James Smith, Developed Markets Economist at ING Bank in London, wage pressures could yet translate into an interest rate rise at the Bank of England before 2019 is out.

"We don't expect a rate hike from the Bank of England this year, but with the latest services PMI hinting at stronger hiring demand and some core inflationary pressure, there are some glimmers of hope for policymakers," says Smith.

The PMI report indicates that wage costs are rising, partly linked to the tight jobs market, but also the marked increase in the minimum wage over recent years.

"The key thing as far as policymakers are concerned is that stronger levels of demand, coupled with “efforts to protect margins”, are prompting firms to pass these higher costs onto the consumer," says Smith.

For Sterling, a Bank of England interest rate rise in 2019 would prove a supportive development as currencies tend to rise when their central bank is in hiking mode, particularly when the counter-party currency's central bank is standing pat or cutting rates.

Survey respondents commented on greater intakes of new work and a slight improvement in underlying business conditions since the start of spring.

There were however widespread reports that Brexit uncertainty had held back client demand and remained a headwind to growth.

"Optimism about the year ahead picked up to an eight-month high, in part reflecting an easing of near-term concerns due to the extension of the Brexit deadline to 31st October. However, it is clear that many businesses remain cautious in relation to spending and investing in the uncertain political environment, which is exacerbating the impact of a wider global economic slowdown on the UK," says Chris Williamson, Chief Business Economist at IHS Markit.

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