Reuters News - UK service sector grows at fastest pace in 16 years

A woman pushes a sandwich cart past St James's Palace in London October 23, 2013.

Credit: Reuters/Toby Melville

By David Milliken

(Reuters) - Activity in Britain's services sector increased at the fastest rate since May 1997 last month, raising the prospect of a big jump in economic growth in the final three months of 2013, a closely watched survey showed on Tuesday.

Financial data company Markit said its services purchasing managers' index rose to 62.5 in October from September's 60.3, easily beating economists' forecasts for a fall to 59.8 and increasing the chance that the Bank of England will revise up its quarterly growth forecasts next week.

Readings above 50 point to growth, and Markit said that combined with strong PMI surveys for manufacturing and construction, Tuesday's data suggest quarterly economic growth of 1.3 percent, up from 0.8 percent between July and September.

"The UK economic recovery moved up a gear again in October," said Chris Williamson, chief economist at Markit.

"Manufacturing, services and construction all continued to see very strong rates of expansion, pointing to an ongoing broad-based upturn. However it is the services sector which, due to its sheer size, is the major driving force," he added.

Britain's economy - which looked on the verge of its third recession in five years at the start of 2013 - has repeatedly surprised on the upside this year, and Markit's composite PMI is its highest since records began in 1996.

Britain's position contrasts sharply with that of the euro zone, where last week unemployment hit a record high while the annual inflation rate tumbled, bringing a possible European Central Bank interest rate cut into view.

However total UK output is still well below its 2008 peak - a much weaker state of affairs than in most other big advanced economies - and in August the BoE pledged not to raise interest rates before unemployment falls to 7 percent.

The BoE forecast in August that Britain's jobless rate - now 7.7 percent - would take more than three years to sink that low, a timescale many economists think will be brought forward when the central bank publishes fresh forecasts next week.

The Markit survey showed that employers in the services sector were hiring staff at the fastest rate since May 1997. A broader composite employment index, which includes manufacturers and construction firms, rose to its highest since that series started in January 1998.

PUBLIC SECTOR AND CONSUMERS UNDER PRESSURE

Markit's surveys do not cover the UK public sector - where more cuts to jobs and spending are planned as part of the government's austerity programme - or British retailers, who have had mixed fortunes due to falling disposable income.

The British Retail Consortium, which represents larger chains, said earlier on Tuesday that its members experienced modest annual sales growth of 2.6 percent in value terms in October.

However, prospects for the rest of the services sector appear brighter. The services PMI's new orders component rose to 63.4 in October from 60.6 in September, indicating the fastest inflow of orders since the survey started in July 1996.

Firms reported getting longer-term contracts than before, and that some were linked to growing activity in Britain's property market, where the government has announced several measures aimed at boosting construction and home purchase.

The services PMI also pointed to potential future inflation pressures. Firms reported that they were reaching capacity constraints, with backlogs of work rising at the fastest rate since May 1997, and that as well as hiring more staff, they were also raising salaries.

Firms faced the biggest rise in input costs in eight months, and raised the prices they charged to consumers at the fastest rate since May 2011.