Services provide year-end boost to UK economy

Data from the purchasing managers’ index reflects a positive performance for the services sector at the end of 2017. However, observers have questioned the sustainability of the upturn.

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The UK’s dominant services sector, which accounts for more than three-quarters of GDP, out-performed economists’ expectations in December to end the year on a high, according to new data.

Positive PMI for the end of 2017

The 54.2 reading on the IHS Markit/CIPS purchasing managers’ index (PMI) was up from 53.8 in November in an index where a reading above 50 indicates growth.Data from the services sector came on the heels of PMIs for manufacturing and construction, both of which showed expansion during December.
Chris Williamson, IHS Markit’s chief business economist, said the services’ performance could boost UK economic growth to 0.5 per cent in the final quarter of 2017.“December saw a welcome upturn in service sector activity, highlighting the continued resilience of the economy as 2017 came to an end,” he said.“Alongside the solid expansion seen in manufacturing and modest construction sector upturn, the survey data are consistent with the economy having grown 0.4 to 0.5 per cent in the fourth quarter of 2017.“However, as has been increasingly the case in recent months, the good news comes with a health warning about the sustainability of the upturn.“Digging into the details behind the resilient strength signalled by the headline numbers, the survey data reveals an economy that is beset with uncertainty about the outlook, which is in turn dampening business spending and investment.”

Balanced economic outlook

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, added, “The business activity index recovered in December, but only to its 2017 average. In addition, new orders increased at the slowest rate since August 2016 and employment growth eased to a nine-month low.“A weighted average of the manufacturing, construction and services PMIs in Q4 is consistent with GDP rising by 0.4 per cent, quarter-on-quarter – the same as in Q3 – but official data for October suggest that a slightly weaker result is likely.”The manufacturing PMI for December showed a reading of 56.3, down from a four-year high of 58.2 in November but still ending the 2017 on a high, mainly thanks to growing export demand from Europe, China, the Middle East and the US.
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Rob Dobson, director at IHS Markit, said. “Although growth of output and new orders moderated during December, rates of expansion remained comfortably above long-term trend rates. The sector has, therefore, broadly maintained its solid boost to broader economic expansion in the fourth quarter.“The outlook is also reasonably bright, with over 50 per cent of companies expecting production to be higher one year from now.“The main growth engines were the intermediate and investment goods sectors during December, suggesting resilient business-to-business demand and capital spending trends, albeit in part due to rising exports.”

Manufacturing expecting robust performance

Howard Archer, chief economic adviser to EY ITEM Club, commented, “With December and November surveys from both the purchasing managers and the CBI also robust, the manufacturing sector looks likely to have produced another robust performance in the fourth quarter after expanding 1.3 per cent quarter-on-quarter in the third quarter.”The PMI for the construction sector remained in positive territory last month at 52.2 but growth eased off from November because of a continuing slowdown in commercial building and civil engineering work.

Construction remains more moderate

Tim Moore, IHS Markit’s associate director, said, “The UK construction sector achieved a moderate expansion of business activity at the end of 2017, although the recovery remained uneven and slowed overall since November.“Construction companies indicated that another strong contribution from housebuilding helped to offset subdued civil engineering activity and reduced volumes of commercial work.“Total new orders picked up at the fastest pace for seven months in December, which provides a positive signal for construction workloads in the short-term.“Resilient demand and forthcoming project starts also led to greater job creation and the strongest increase in input buying for two years.”
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