UK service sector grew at fast pace in December, PMI rose to 56.2

In December 2016, the UK’s service sector expanded at its fastest rate since mid-2015, according to an industry survey.

The Markit/CIPS Purchasing Managers’ Index (PMI) for the services sector increased to a 17-month high of 56.2 in December from 55.2 in November – the highest level since July 2015. There was a pick-up in new business and job creation.

Image source: Markit

Economists polled by Reuters had forecast a December reading of 54.7.

Cost pressures remained “elevated” at the end of 2016. Input prices increased at the second-fastest rate in over five years due to the weak pound.

“A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown,” said Markit’s chief business economist, Chris Williamson.

“At face value, this improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut,” he added.

“However, policymakers will consider the current resilience of the economy alongside the elevated levels of uncertainty highlighted by the historical weakness of business optimism about the year ahead. Any change in policy therefore looks unlikely in the short term, but the next move in policy could as much be a rate hike as a cut.”

The British Chambers of Commerce carried out a separate survey of businesses which similarly indicated that the UK economy kept its momentum in final quarter of 2016, whilst also highlighting the fact that firms are facing pressure to increase prices.

The BCC said: “Firms in both sectors, particularly in manufacturing, are facing pressure to raise prices, principally as a result of the cost of raw materials and other overheads.”

Dr Adam Marshall, the BCC’s director general, added:

“Overall, our findings suggest growth will continue in 2017, albeit at a more modest pace.

“The government must act strongly this year to support investment and improve the business environment – both of which are crucial to boosting business confidence, and therefore further growth.”

Scott Bowman at the consultancy Capital Economics was quoted by The Guardian as saying:

“A moderation in growth in 2017 seems likely as rising inflation eats into households’ real income growth.

“Nonetheless, the support provided to activity from a lower pound and rock-bottom interest rates should prevent growth from slowing too sharply. Overall, our forecast is for GDP growth to ease from around 2.0% in 2016 to about 1.5% in 2017.”