Growth in services sector fastest for 16 years

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Britain’s dominant services sector grew at its fastest pace for 16 years in the third quarter of the year, fuelling hopes that the overall economy will have performed better than already-buoyant expectations.

The closely watched Markit/CIPS purchasing managers’ index (PMI) showed that activity in the sector – which accounts for three-quarters of UK output – increased at the highest rate since the second quarter of 1997 from June to September

Combined with strong performance from other sectors this week, economists said it suggested growth for the period of around 1.2 per cent – a level not reached since the third quarter of 2007.

It would represent a sharp improvement on the 0.7 per cent growth in the second quarter of this year.

Official data for the third quarter will be published later this month.

A headline reading for September of 60.3 for services – where 50 separates growth from contraction – was a slight fall on August’s seven-year high of 60.5 and follows a slight slowing in expansion also recorded for manufacturing and construction.

The services sector figures showed that increases in activity and new business saw a return to solid employment growth after a slowdown in August, after the upturn meant increasing backlogs of work, prompting bosses to add to payrolls.

It means the sector has been growing continuously over nine months.

Firms reported improved business confidence leading to a greater willingness to commit to new contracts.

However, fuel inflation and some rising wages saw operating costs continue to soar, with companies unable to pass them on because of price competition.

Vicky Redwood, of Capital Economics, said the figures were “more evidence that the recovery is becoming well-entrenched”.

She said that taken together the surveys from all three sectors suggested gross domestic product (GDP) growth of 1.3 per cent in the third quarter, likely to be around 1.2 per cent when other factors such as retail sales and industrial production were included.

Chris Williamson, chief economist at survey compilers Markit, said growth in the services sector was being led by financial services – linked to increased housing market activity – and the business sector.