U.K. Services Growth Accelerates to Fastest in 16 Years: Economy

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A waiter carries a customer's receipt and change on a small metal tray in Brixton Village in London. Close

A waiter carries a customer's receipt and change on a small metal tray in Brixton Village in London.

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Photographer: Simon Dawson/Bloomberg

A waiter carries a customer's receipt and change on a small metal tray in Brixton Village in London.

U.K. services growth unexpectedly accelerated to the fastest pace in 16 years in October as the economy showed signs of pulling away from the rest of Europe.

A gauge of activity rose to 62.5 from 60.3 in September, the highest since May 1997, Markit Economics said today in London. The report came as the European Commission forecast the U.K. economy will grow 2.2 percent next year, twice the pace of the euro area and more than Germany and France.

U.K. manufacturing and construction also expanded last month, and Markit said its surveys point to accelerating economic growth. While the 17-nation euro region is struggling to recover from a debt crisis, the brighter U.K. outlook may prompt the Bank of England to raise its own forecasts when Governor Mark Carney publishes new projections next week.

The composite U.K. industry reading “is suggesting that fourth-quarter growth could rise as much as 1.5 percent,” said James Knightley, a senior economist at ING Bank NV in London. “It is difficult to believe that any other major economy will come close to that in the fourth quarter.”

The median forecast of 30 economists in a Bloomberg News survey was for the services index to decline to 60. The gauge has been above the 50 level that divides expansion from contraction for 10 months.

The pound rose against the dollar and was trading at $1.6048 as of 11:15 a.m. London time, up 0.5 percent from yesterday. The yield on the benchmark 10-year U.K. government bond climbed 6 basis points to 2.68 percent.

EU Forecasts

The European Commission said today that U.K. gross domestic product will rise 1.3 percent this year and 2.2 percent next year, more than previously projected. The euro area will grow 1.1 percent in 2014, less than the 1.2 percent forecast in May, after shrinking 0.4 percent this year. The German economy, Europe’s largest, will expand 1.7 percent, according to the commission.

“The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement. “But it is too early to declare victory. Unemployment remains at unacceptably high levels. That’s why we must continue working to modernize the European economy.”

U.K. Outlook

Britain’s economy grew 0.8 percent in the third quarter, the fastest in three years, and both the Confederation of British Industry and the National Institute of Economic and Social Research lifted their forecasts this week.

Markit said the BOE will also probably acknowledge the improving recovery in its Inflation Report on Nov. 13. It said the BOE will probably bring forward its expectation of when unemployment will fall below 7 percent, which it has set as a threshold for considering raising rates. The central bank in August said it may not reach that level until late 2016.

Markit’s services survey showed that new business rose by a record in October and hiring increased at the fastest pace since May 1997. Rising energy bills pushed up input-cost inflation to the highest in eight months.

“The unemployment rate is on track to drop below the 7 percent forward guidance threshold well ahead of schedule,” said Nida Ali, economic adviser to the Ernst & Young ITEM Club. “We expect it by mid-2015, a year ahead of the Bank of England’s current forecast.”

The central bank will probably keep the benchmark rate at a record-low 0.5 percent this week, while the bond-purchase plan will stay at 375 billion pounds ($602 billion), according to Bloomberg surveys. It will announce its decisions on Nov. 7.

In its report, Niesr said its sees the economy expanding 1.4 percent this year and 2 percent in 2014. That’s up from 1.2 percent and 1.8 percent projected in August.

“After two years of stagnation, economic growth has returned, underpinned by an increase in consumer spending,” the institute said. “Consumer-spending growth is necessary for an economic recovery in the U.K., but a consumer-driven recovery will not be balanced.”

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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