UK services complete PMI ‘hat-trick’ following Brexit

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The services sector has shown a healthy rebound in August, reaching 52.9 compared to its 89-month low of 47.4 in July, which was its first reading since the UK’s vote to leave the European Union.

The figure rounds out positive PMIs for manufacturing and construction released last week and suggest the UK may avoid a contraction in its economy in the third quarter if each sector continues to hold up.

The healthier services report completes a hat-trick of  much improved purchasing managers’ surveys for August after a dire July collection, and it is particularly significant given the dominant role of the services sector,” says IHS Markit chief UK and Europe economist Howard Archer.

The gain of 5.5 points is the largest in the survey’s two decade history, however, the reading is weak by historical standards.

Input costs have risen at their fastest rate since November 2013 as services companies start to feel the impact of weak sterling.

Job creation resumed in August, but the rate of workforce growth was weak.

IHS Markit chief business economist Chris Williamson says the three PMIs point to a stagnation of the economy in the third quarter, but says much rests on the September readings to determine whether the UK economy contracts or ekes out modest growth.

“It remains too early to say whether August’s upturn is a dead cat bounce or the start of a sustained post-shock recovery, but there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate.”

Williamson says the new government and swift monetary stimulus measures have helped ease uncertainty.

However, although improving on July’s seven – year low, business confidence is still at one of its lowest levels seen over the past four years.

“Many companies remain worried about the outlook and how the economy will are in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth.”

Hargreaves Lansdown senior analyst Laith Khalaf says: “In terms of services output, today’s reading is simply in line with survey results earlier in the year, and it is last month’s sharply negative reading which is the outlier.”

However, he says services are the “engine” of the UK economy and if the positive mood continues that should put a “spring in the step of the pound” on the currency markets.