U.K. Economy Rebounds With Unexpected Services Strength

(Bloomberg) -- Growth in Britain's services sector unexpectedly strengthened in April, giving the economy a solid start to the second quarter after a weaker-than-forecast performance at the start of the year.

IHS Markit's index rose to 55.8 in April from 55 in March, defying expectations for a decline to 54.5. Its measures for manufacturing and construction published earlier this week also improved, and the gauges suggest U.K. economic growth is running at a 0.6 percent pace.

Markit chief economist Chris Williamson said 0.4 percent expansion should be possible for the second quarter as a whole after a slowdown to 0.3 percent in the first three months of the year.

The services survey also showed that new business grew at the fastest pace this year and employment rose, albeit modestly. But while confidence remains high within the sector -- the biggest part of the economy -- a number of respondents cited “persistent Brexit-related uncertainty” and concerns that faster inflation will damp consumer spending. There were signs of weakness in April in household-facing businesses such as hotels and restaurants.

“Despite on going political noise coming from the snap elections and the start of Brexit negotiations, U.K. demand is holding up well, with the improving international backdrop offsetting the normalization in domestic demand after a surge in late 2016,” said Kallum Pickering, an economist at Berenberg in London.

A separate report from the Bank of England showed that household borrowing continues to rise. Unsecured credit climbed 4.7 billion pounds in the first quarter, the most in a year, meaning Britons now owe almost 200 billion pounds on top of their mortgages -- more than at any time since the 2008 financial crisis.

“The strengthening of growth and the upturn in prices will bolster calls for higher interest rates” from the BOE, Williamson said. “But weak growth in the consumer sector remains a concern, and is something which could intensify.”

The extent of the building inflation pressures was apparent in the services survey, with costs rising sharply again in April, partly thanks to the weaker pound. Companies noted higher food and fuel prices, along with a new minimum wage.

To protect margins, they are passing on much of those cost increases to customers, with the prices-charged index signaling the sharpest inflation since 2008.

--With assistance from Mark Evans and Harumi Ichikura

To contact the reporter on this story: Fergal O'Brien in London at fobrien@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Andrew Atkinson