Pound boosted as service sector growth picks up

The pound has risen after a closely watched survey suggested that growth in the UK's key services sector was faster than expected in May, renewing talk of a possible interest rate rise.

The purchasing managers' index (PMI) from IHS Markit/CIPS hit a three-month high of 54.0, up from 52.8 in April. A figure above 50 indicates expansion.

The PMI reading prompted a 0.6% rise in sterling against the dollar to $1.3386.

However, the survey also warned that growth could slow in the months ahead.

It found weak growth in new orders among companies, and also said that worries over Brexit remained.

Mixed outlook

The services sector accounts for about 80% of the UK economy. The latest PMI survey "signalled a solid upturn in overall business activity across the service economy", IHS Markit said.

Some of the improvement last month was due to companies catching up on work after heavy snow in early 2018. However, the survey also found that growth in new orders "continued to rise at a relatively subdued rate".

Chris Williamson, chief business economist at IHS Markit said: "The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but... raises questions about the outlook.

"Disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence."

The services PMI comes after similar surveys of the manufacturing and construction sectors. Mr Williamson said that, taken together, the surveys indicated growth of 0.3-0.4% in the second quarter of the year, compared with just 0.1% in the first quarter.

He added that signs of economic growth rebounding could raise the chances of the Bank of England increasing interest rates again, "but with the forward looking indicators suggesting that the economy could relapse, a rate rise is by no means assured".

Cost pressures

The survey found that job creation growth was the second weakest since March of last year, with anecdotal evidence that it was being hampered by a lack of skilled candidates for jobs.

Meanwhile, costs were being pushed higher by rising oil prices and wages, "although subdued demand means firms are struggling to pass these higher costs onto customers", Mr Williamson said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said a second-quarter recovery for the UK's economy was "on track", giving the Bank of England a brief window to raise interest rates.

"May's services report increases our conviction that GDP growth will recover in Q2 following weather-related weakness in Q1," he said.

Howard Archer, chief economic adviser to the EY Item Club, said the latest batch of PMI surveys pointed to "a reasonable but hardly dynamic pick-up in UK economic growth in May".

"Furthermore, weakened new business growth maintains concerns over the outlook for the economy," he added.