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U.K. Services Surge Indicates GDP Rebound as BOE Officials Meet

U.K. Services Surge Indicates GDP Rebound as BOE Officials Meet
A chambermaid cleans a bedroom at a Premier Inn hotel at Heathrow airport in London. Photographer: Chris Ratcliffe/Bloomberg

U.K. services growth accelerated more than economists forecast in August, suggesting the economy may be recovering from a slump and adding to the case for the Bank of England to refrain from expanding stimulus tomorrow.

A gauge based on a survey of purchasing managers surged to 53.7, the highest in five months, from 51 in July, Markit Economics and the Chartered Institute of Purchasing and Supply said in London yesterday. Economists had forecast an increase to 51.2, according to the median of 28 estimates in a Bloomberg News poll. A reading above 50 indicates growth.

The report came on the eve of the Bank of England Monetary Policy Committee’s monthly two-day meeting and indicated the economy may be strengthening after a 0.5 percent slump in the second quarter. While a separate gauge this week showed U.K. construction unexpectedly shrank last month, a manufacturing index increased more than economists had forecast.

The improvement “makes it even more likely that the MPC will leave policy unchanged,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. The surveys suggest the economy “may just about be clawing its way out of recession,” she said.

Redwood is one of 38 out of 39 economists in a Bloomberg survey who predict the Bank of England will maintain its current bond-buying target at 375 billion pounds ($596 billion) tomorrow. The central bank is due to complete its current 50 billion-pound round of purchases in November.


Royal Bank of Scotland Group Plc said the manufacturing and services reports “reinforce confidence” that third-quarter gross domestic product will recover after the second-quarter slump. It forecasts 0.5 percent growth and said risks around this “have now shifted from the downside to the upside.”

Still, CIPS noted in yesterday’s report that the environment is “challenging.” Nomura International Plc said the surveys don’t change the broader economic picture and it expects an additional 25 billion pounds of bond purchases to be announced in November.

CIPS Chief Executive Officer David Noble said that while confidence at services companies rose to a three-month high in August, it remains “historically subdued.” The survey also showed that backlogs of work fell for a fourth month and employment increased the slowest since February. Chris Williamson, chief economist at Markit, said the slow pace of hiring indicates that companies expect conditions “to remain very tough in the coming months.”

“The big question is whether the expansion can be sustained,” he said. “Any economic growth after the third quarter rebound is likely to be lackluster at best unless demand picks up meaningfully in the autumn.”

Olympic Effects

The Markit report showed that input-price inflation at services companies accelerated to a four-month high and output prices increased for the first time since April.

There was anecdotal evidence that the London Olympic Games had a mixed effect, according to the report, with some respondents saying it had a positive impact and others saying travel disruption restricted activity.

Separate data yesterday showed that U.K. retail sales fell in August for the first time in four months as the Olympics distracted Britons and kept shoppers away from London. Sales at stores open at least 12 months, measured by value, dropped 0.4 percent from a year earlier, the British Retail Consortium said.

The services report was due to be published today at 9:30 a.m. Markit issued it yesterday afternoon after it was inadvertently released early by Reuters.

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