U.K. Services Growth Accelerates as Recovery Takes Hold: Economy

U.K. Services Growth Accelerates in June to Fastest in Two Years
An employee carries drinks at a coffee store in Amersham. Photographer: Simon Dawson/Bloomberg

U.K. services growth unexpectedly accelerated to its fastest pace in more than two years in June in a sign the recovery is gaining strength.

An index of activity rose to 56.9 from 54.9 in May, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London. Economists had forecast 54.5 in June, according to the median of 33 estimates in a Bloomberg News survey. Readings above 50 indicate expansion. The pound rose.

Manufacturing and construction also strengthened in June and Markit said its indexes point to second-quarter economic growth of at least 0.5 percent. With the economy improving, the Monetary Policy Committee will probably leave its stimulus program unchanged tomorrow as Mark Carney leads his first meeting after taking over at the Bank of England.

“The breadth of the improvement in the U.K. data is striking,” said Allan Monks, an economist at JPMorgan Chase & Co. in London. “It is too early to identify the demand drivers of the upswing. But the output data alone are enough to suggest this strength will spill over into the third quarter.”

The pound rose against dollar after the report. It was at $1.5245 as of 10:57 a.m. in London, up 0.6 percent from yesterday. The yield on the 10-year U.K. government bond dropped 4 basis points to 2.34 percent.

Confidence Improves

New business at service companies climbed at the strongest pace in six years, leading to the fastest increase in backlogs and hiring since August 2007, Markit said. Sentiment was at the highest in 14 months.

While output prices rose at the most in two years in June, input costs increased faster, putting margins under pressure, according to Markit. “Competition prevented companies from fully passing on higher cost burdens,” it said.

Markit’s U.K. construction index rose to 51 in June from 50.8 in May, while the factory gauge climbed to a two-year high of 52.5 from 51.5.

“New orders and job creation across all sectors are now rising at the fastest rates for almost six years, led by the vast services economy, boding well for robust growth momentum to be sustained as we move into the second half of the year,” Markit Chief Economist Chris Williamson said.

The BOE will keep its quantitative-easing program at 375 billion pounds ($571 billion) tomorrow, according to all 44 economists in a poll. It will also hold the key interest rate at a record low of 0.5 percent, another survey shows.

The industry data “mark a good first week for the new Bank of England governor and will ease pressure on the MPC to embark on another round of QE,” CIPS Chief Executive Officer David Noble said.

Credit Conditions

Data from the BOE today showed banks boosted mortgage availability and lowered borrowing costs in the second quarter and signaled they may increase the supply of riskier loans.

An index of home-loan availability rose to 17.4 from 17 in the first three months of the year as banks pushed for market share, according to the quarterly Credit Conditions Survey. An expectations index for the third quarter was at 17.2.

“Evidence that a recovery in the economy may be finally taking root is becoming more telling,” said Martin Beck, an economist at Capital Economics in London. “The recovery still faces some headwinds but, for now at least, things seem to be moving in the right direction.”

Euro Recession

In the euro region, the picture is less positive, with a services gauge showing the industry contracted at a faster pace than initially estimated in June as the 17-nation currency bloc struggled to emerge from a record-long recession. The index rose to 48.3 from 47.2 in May, Markit said separately today. That’s below an initial estimate of 48.6 on June 20. A composite gauge of euro-area services and manufacturing output increased to 48.7 from 47.7.

Growth in China’s service industries slowed last month, according to a separate report today. The official non-manufacturing purchasing managers’ index from the National Bureau of Statistics and the China Federation of Logistics and Purchasing fell to 53.9 in June, a nine-month low, from 54.3 in May. Another service PMI released today by HSBC Holdings Plc and Markit rose to 51.3 last month from 51.2 in May.

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