U.K. Services Growth Picks Up Though Warning Signs Cloud Outlook

(Bloomberg) -- U.K. services activity unexpectedly accelerated in September and price pressures increased, according to a report by IHS Markit.

While the pound rose after the better-than-forecast headline number, the survey on Wednesday also showed that growth in new business fell to the weakest in more than a year and confidence declined. Some firms said that clients were holding off on major investment decisions because of Brexit uncertainty.

The report paints a mixed picture for the Bank of England, where policy makers have turned hawkish and indicated they may be close to raising interest rates. While the pace of economic growth remains modest, a buildup of inflationary pressures is raising concern at the central bank.

The economy is “struggling with the unwelcome combination of sluggish growth and rising prices, presenting a dilemma for policy makers,” said Chris Williamson, chief business economist at Markit.

In a separate report, PwC said U.K. economic growth probably remained at a “modest” 0.3 percent pace in the third quarter. The U.K. was the worst-performing Group of Seven economy in the second quarter, and BOE Governor Mark Carney says it may remain below the average into the middle of next year.

Markit said its industry surveys also suggest a 0.3 percent expansion last quarter. The services Purchasing Managers Index increased to 53.6 last month from 53.2 in August. Economists had forecast a reading of 53.2. Input costs advanced at the fastest pace in seven months.

But after weaker numbers from manufacturing and construction earlier in the week, the all-sector PMI fell to a seven-month low in September, and Markit said it's now at a level that would normally be associated with policy loosening rather than tightening.

“The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow-up on its increasingly hawkish rhetoric,” Williamson said. “However, the decision is likely to be a difficult one.”

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--With assistance from Mark Evans

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, Lucy Meakin, Brian Swint