Services Maintain Growth After Best Quarter Since 1997

U.K. services growth maintained its pace of expansion in September, capping the best quarter for the industry in 16 years with an increase in confidence and hiring.

A gauge of activity was at 60.3 after reaching a seven-year high of 60.5 in August, Markit Economics said today in London. The median estimate of 24 economists in a Bloomberg survey was 60.5. A reading above 50 signals expansion. Euro-area services grew more than initially estimated and a Chinese gauge rose to a six-month high, separate reports showed.

U.K. construction and manufacturing also expanded last month, and Bank of England Markets Director Paul Fisher said yesterday there has been a “significant shift” in the recovery. Markit said its surveys point to expansion of as much as 1.2 percent in the third quarter after 0.7 percent in the three months through June.

“There are encouraging signs that the strong pace of expansion will persist,” said Chris Williamson, chief economist at Markit in London. “September saw one of the largest inflows of new business ever seen by the services survey and business confidence about the year ahead picked up again.”

Markit said new business at service companies rose last month, while sentiment improved and payrolls increased at a “solid rate.” The pound erased its decline against the dollar after the survey was published. It was trading at $1.6232 as of 10:58 a.m. London time, up 0.1 percent from yesterday.

‘Interesting Questions’

BOE Governor Mark Carney repeated his message yesterday that officials won’t consider tightening policy until the economy is growing at a “sustained pace.” The central bank plans to keep the key interest rate at a record low of 0.5 percent at least until unemployment drops to 7 percent. It forecasts that won’t happen until late 2016 as an expected pickup in productivity restrains hiring.

David Tinsley, an economist at BNP Paribas SA in London, said the growth in services employment “raises interesting questions” about how the higher output will be divided between jobs growth and productivity improvements.

“For now it appears to be relatively evenly split,” he said. Any sign that it’s coming “disproportionately from employment growth, and hence falling unemployment, will have implications as to when the market anticipates the BOE will ‘take stock’ of its forward guidance.”

Boom and Bust

Carney, in an interview with ITV Anglia television yesterday, also said policy makers must make sure the housing market recovers in a sustainable way. Mortgage lender Halifax said today that home prices increased 0.3 percent in September, an eighth consecutive gain, lifting the average value to its highest level since September 2008.

The BOE has tools to ensure the housing market “isn’t in a boom and then a bust phase,” Carney said. “We will take those responsibilities very deliberately, very prudently and act in a proportionate fashion.”

Markit’s index of U.K. construction slipped to 58.9 in September from a record 59.1 in August, it said yesterday. A manufacturing gauge fell to 56.7 from a 2 1/2-year high of 57.1.

“The surveys suggest that the fourth quarter is starting on a strong note too,” said Vicky Redwood, chief U.K. economist at Capital Economics Ltd. in London. “Overall, then, more evidence that the recovery is becoming well-entrenched.”

Fisher said the U.K. economy is now expanding “at least around trend” and “forward-looking indicators signal that that pace of growth will be maintained for the next two quarters.”

China Rebound

In the euro area, a services index rose to 52.2 last month. That exceeded a Sept. 23 estimate of 52.1 and was up from 50.7 in August. The gauge has been above 50 for two months.

A Chinese index of services activity rose to a six-month high, adding to signs that the world’s second-biggest economy will sustain a rebound after a two-quarter slowdown. The non-manufacturing purchasing managers’ index increased to 55.4 in September from 53.9 in August, the Chinese statistics office said today.

Services growth in the U.S. probably cooled last month, economists said before a report later today. The Institute for Supply Management’s non-manufacturing index fell to 57 from 58.6 the prior month, according to the median forecast of 75 economists in a Bloomberg survey.

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