UK service sector beats expectations causing pound to rally

    UK service industry
    The strong service sector has already begun predictions of another interest rate hike next year

    The UK service industry, which accounts for roughly 80% of GDP, has seen business activity growth improve after an underwhelming performance in the month previous.The CIPS business activity index was 55.6 for the industry, up from 53.6 in September and above analyst expectations of 53.3.

    This most recent expansion of the service sector was largely driven by improved order books and resilient client demand, as well as operating expenses moving in the right direction as the rate of input cost inflation eased.

    From the anecdotal evidence gleaned from the survey, it was cited that improved domestic demand and successful new product launches, as well as a willingness to support sales by absorbing operating expenses to retain lower pricing, has resulted in the new business gains.

    The survey of purchasing managers in the industry did however note that the rate of job creation had been stifled due to the uncertainty surrounding the business outlook for the year ahead. Confidence towards future growth also remained muted.

    The latest increase in payroll numbers was the weakest since March, and it has been suggested this was down to the caution concerning longer-term demand in the sector and a conscious effort to alleviate pressure on margins.

    Uncertainty in the service industry may be grounded on the fact that backlogs of work decreased for the first time in eight months, suggesting that companies remain cautious about future workload. Business optimism was also reported as well below its long-run trend.

    Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey, said that “the latest PMI surveys bring mixed news on the economy. While an upturn in business activity growth adds some justification to the Bank of England’s decision to hike interest rates for the first time in a decade, a deeper dive into the numbers highlights the fragility of the economy and points to downside risks for the outlook,” referring to Brexit creating a lack of confidence in business.

    Some have already suggested that these latest figures indicate that there will be a further hike in interest rates by the MPC and the pound has climbed against the dollar in today’s trading.