‘Super, smashing, great’ as services sector powers on

New business at companies ranging from restaurants to law firms expanded at the sharpest rate for more than 16 years, an influential survey of purchasing managers showed.

Booming growth in the services sector, which makes up more than three-quarters of the economy, followed upbeat surveys of Britain’s building sites and factories to show the economy is firing on all cylinders.

A composite survey combining the three main sectors hit a record high in August, smashing another record set in July.

The closely-watched Markit/CIPS services purchasing managers’ index (PMI) recorded activity levels of 60.5 in August, well above the 50 mark which separates growth from contraction and building on the 60.2 level in July.

The composite PMI hit a level of 60.7 in August – the strongest level since the combined survey began in 1998 and above July’s 59.5 level.

New business at services firms increased at the sharpest rate since May 1997, while the headline activity rate hit its highest level since December 2006. It was the eighth consecutive month of growth in activity and new orders.

BNP Paribas UK economist David Tinsley labelled the performance “super, smashing, great” as the reading beat City hopes for a 59.5 reading.

He pointed out there have only been 11 previous months where the index has topped 60 – with the last back-to-back readings seen in 1996-97 when the economy was growing at almost 4 per cent.

“The UK services PMI rounds off a great week for the economy from these indicators,” he said. “Whether this performance is sustainable in the medium term is debatable, but for now the improvement is real.”

The data ignited hopes that third-quarter growth can beat expansion of 0.7 per cent in the April to June quarter – with Markit suggesting growth of as much as 1.3 per cent.

Tom Vosa, chief economist at Yorkshire Bank, said: “The UK recovery looks to be broadening, after it stuttered into life this year.

“Given the weakness, this is to be welcomed, although we remain concerned that underlying the current cyclical upswing in activity is a mini-construction boom and consumer spending bolstered by PPI refunds that will gradually fade as the year ends.

“Still, the UK economy was one of the fastest growing in the G7 in Q2 – alongside Germany – and looks like being the fastest growing in the third quarter.

“The major question for the government now, is given the strength of growth, why aren’t the public finances consolidating more quickly?”

Employment stagnated in August, partly because companies were struggling to replace leavers.

Price inflation grew at its slowest pace since May, and output charges rose modestly for the third consecutive month.