U.K. Services Growth Unexpectedly Jumps as Economy Picks Up

(Bloomberg) -- The U.K.'s dominant services sector grew at the fastest pace in eight months in June, driving a bounce back in the nation's economy and boosting the case for a Bank of England rate increase as soon as next month.

The unexpected gain in the gauge of activity followed reports this week showing faster growth in manufacturing and construction. IHS Markit, which publishes the surveys, said they suggest U.K. economic growth doubled to 0.4 percent in the second quarter.

That backs up the argument of BOE officials who say that the economy is rebounding after a weather-hit first quarter -- a case that may be further strengthened by evidence from the survey showing that input costs also spiked in June. Markit predicts that will cause U.K. inflation, already above the BOE's target, to climb from its current level of 2.4 percent.

The pound erased a 0.2 percent slide after the report to trade little changed at $1.3208 as of 10:25 a.m. London time.

“Stronger growth of service-sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher,” said Chris Williamson, chief business economist at Markit.

This week's reports are the last full set of PMI readings BOE policy makers will get before they announce their next decision on Aug. 2. Officials voted 6-3 to hold rates at their June meeting, and investors are currently pricing in about a 65 percent chance of rate increase next month.

Markit said its Purchasing Managers Index for the services industry climbed to 55.1 last month, up from 54 in May and beating economists' estimates for no change. The survey Wednesday also showed the fastest pickup in new work in 13 months, an upturn in demand for business and financial services, and evidence that the sunny weather last month boosted consumer spending.

Still, even with growth gaining momentum, there remain signs that Brexit-related uncertainty is continuing to hold back investment, Markit said. That follows a warning this week from the British Chambers of Commerce that U.K. companies are at “breaking point” over Brexit, and are delaying spending decisions as they await answers to key questions.

“It remains encouraging yet also surprising that current business activity continues to show such resilience amid relatively moribund confidence,” Williamson said. “Such a divergence between current and expected future activity stokes worries that the upturn is being fueled by short-term spending, based on hopes that uncertainty will lift, and likely masks a lack of longer-term business investment.”

More clarity on Brexit could emerge this week as Prime Minister Theresa May holds an all-day cabinet meeting at her Chequers country house on Friday. The premier is facing a fresh showdown with pro-Brexit lawmakers in her party over plans to keep the U.K. closely tied to European Union rules for trading goods after Brexit, according to people familiar with the matter.

--With assistance from Harumi Ichikura and Andrew Atkinson.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Lucy Meakin, Brian Swint

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