UK’s powerful services firms pick up pace but inflation puts clouds on the horizon

Britain’s dominant services firms’ growth accelerated in September, indicating that the economy is still expanding at a moderate pace.
Business activity picked up pace, hiring kept on growing though at a slightly slower pace, and expectations of future business also climbed.
The purchasing managers’ index (PMI) from IHS Markit, an influential survey, climbed to 53.6, up from 53.2 in August.
Any score of above 50 indicates growth, so this figure shows a steady expansion.
However, economists are concerned that the new business component of the index slipped to 53.3, its lowest level since summer 2016 in the aftermath of the Brexit referendum.
The index for input prices also increased to 64.8, its highest level since February, indicating that inflation could remain elevated for some time.
It comes after a strong manufacturing survey but also a construction index that indicates the building sector is contracting.
“The three PMI surveys put the economy on course for another subdued 0.3pc expansion in the third quarter, but the fourth quarter could see even slower growth,” said Chris Williamson, chief business economist at IHS Markit.
“The surveys therefore portray an economy struggling with the unwelcome combination of sluggish growth and rising prices, presenting a dilemma for policymakers.”
The surveys could make it difficult for the Bank of England to judge whether or not to raise interest rates at next month’s Monetary Policy Committee meeting.
Mark Carney and his colleagues have indicated that they intend to raise rates to 0.5pc.
However the PMIs indicate growth has slowed a little, which would usually mitigate against a rate rise. Pushing in the other direction is a modest rise in price inflation reported by businesses.
UK’s powerful services firms pick up pace but inflation puts clouds on the horizon

Mark Carney is looking at raising interest rates next month, but growth wobbles could make that decision harder

Chris J Ratcliffe/ PA
Samuel Tombs at Pantheon Macroeconomics believes the PMIs are “closer to levels seen when rates have been cut - not hiked - in the past”.
“The MPC emphasised last month that a rate rise was not guaranteed, but was contingent on ‘the economy continuing to follow a path consistent with the prospect of a continued erosion of slack’,” he said.
“The latest PMIs - especially the decline in their forward-looking balances - do not warrant such optimism. As such, we continue to think that markets have gone too far in pricing in a 75pc chance of a November rate rise.”
Meanwhile the surge in growth in the eurozone showed no signs of slowing down.
The currency area’s composite PMI rose to 56.7 in September, up from 55.7 in August.
Germany led the pack with a score of 57.7, its highest level in more than six years.
Ireland followed at 57.6, France was next with a PMI of 57.1, and Spain’s growth was close behind at 56.4.
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