UK services sector unexpectedly grows in July despite 'Brexit uncertainty'

Growth in the UK’s key service industries picked up faster than predicted, but economists have still warned that the economy is “only just” avoiding recession.

The IHS Markit/CIPS UK services purchasing managers’ index (PMI) showed a reading of 51.4 in July, up from 50.2 in June.

Economists had been expecting a reading of 50.4.

The headline index jumped to a nine-month high, however confidence and jobs growth both declined in the period, according to the survey.

A renewed increase in new work for the period helped drive the sector towards modest growth in July.

A number of companies involved in the survey said they saw improved international sales, helped by the weakness in sterling against the dollar and the euro.

However, the PMI remains significantly below the average since the end of the financial crisis, at 54.4.

Service firms said that recruitment continued to grow, but slowed down as firms described a decline in backlogs of work.

The latest data also highlighted a sharp increase in the cost burden facing service firms, as companies reported a rise in business expenses, due to higher wages and rising fuel costs.

Chris Williamson, chief business economist at IHS Markit, which compiles the PMI survey, said: “An improved rate of growth in the service sector to the highest since October is welcome news after other PMI surveys showed the sharpest drop in manufacturing output for seven years and a construction sector that is mired in its deepest downturn for a decade.

“However, the overall picture is one of an economy that is only just managing to skirt recession, with July’s performance among the worst since the height of the global financial crisis in 2009.

“Even growth in the service sector remains worryingly subdued, constrained by a marked fall in business services activity, where the rate of decline in July has been exceeded only once in the past 10 years.”

The services figures followed disappointing manufacturing and construction data for the month bringing the PMI all-sector index to 50.3, representing marginal expansion in the economy.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “While services activity grew in July, this marginal improvement on last month is a smokescreen.

“Fundamental weaknesses remain in a sector pinned down by Brexit uncertainty and increasingly stagnant global economic growth.”