Brexit, Prices Hang Over Resilient U.K. Services Industry

(Bloomberg) -- The U.K. services industry grew faster than economists expected in December, capping a resilient final quarter of 2017.

IHS Markit's Purchasing Managers Index rose to 54.2 from 53.8 in November, beating the reading of 54 predicted by economists.

Taken together with surveys on manufacturing and construction, it suggests the economy grew between 0.4 percent and 0.5 percent in the fourth quarter, broadly maintaining the pace of the previous three months, Markit said on Thursday. The pound strengthened 0.2 percent to $1.3539 as of 9:45 a.m. London time.

However, price pressures remain a challenge for companies and uncertainty over Brexit is weighing on investment, casting doubt over whether the economy can maintain its momentum, Markit warned. Demand rose at the slowest pace in 16 months.

“The good news comes with a health warning about the sustainability of the upturn,” said Chief Business Economist Chris Williamson. “The survey data reveal an economy that is beset with uncertainty about the outlook, which is in turn dampening business spending and investment.”

Britain relies heavily on its services industry, which accounts for about 80 percent of gross domestic product.

Cost Pressures

Firms' operating expenses rose at the fastest pace in three months in December, reflecting rising transportation costs, staff salaries, utility bills and food prices. In response, they raised the prices they charge their customers, Markit said.

Subdued business investment and “cost-consciousness” among clients held back sales growth, Markit said. Business confidence picked up to a seven-month high, but remained subdued compared to its long-run average.

The improvement in optimism was partly linked to hopes of a boost to demand from a buoyant global economy. In the euro area, a composite index of manufacturing and services rose in December to its highest since February 2011, showing that the economy gained further momentum at the end of 2017.

--With assistance from Harumi Ichikura Mark Evans and Lucy Meakin

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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