Record Jump for U.K. Services Index as Brexit Shock Dissipates

Updated on
  • Gauge surges to 52.9 in August from 47.4, beating estimates
  • Data adds to evidence of economic rebound after Brexit vote

Is Record U.K. Data Enough to Fade Brexit Blues Entirely?

A gauge of U.K. services jumped the most on record in August, adding to evidence of an economic rebound following the shock inflicted by the decision to leave the European Union.

IHS Markit said its Purchasing Managers Index surged to 52.9 from a seven-year low of 47.4 in July, the biggest monthly gain since the survey began two decades ago. The median estimate of economists in a Bloomberg News survey was for a rise to 50, the level that divides expansion from contraction.

A return to growth in the largest part of the economy is likely to intensify speculation the Bank of England will refrain from unleashing further stimulus this year. Markit predicted “an imminent recession will be avoided” but urged caution, saying data since the June Brexit referendum point to stagnation so far this quarter and many firms remain concerned about the outlook.

“It remains too early to say whether August’s upturn is a dead-cat bounce or the start of a sustained post-shock recovery,” Chris Williamson, an economist at Markit, said in a statement on Monday. “But there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate.”

The pound rose as high as $1.3376 following the report, its highest level since the middle of July. It was at $1.3325 as of 11 a.m. London time, up 0.2 percent since Friday.

‘Difficult Times’

Markit surveys last week showed manufacturing and construction both rebounding in August, with factory activity expanding at the fastest pace in 10 months. A composite index of all three industries climbed to 53.6 in August from 47.6 in July, also beating estimates.

On Wednesday, BOE Governor Mark Carney is to give his first public appearance since the central bank unleashed a barrage of stimulus last month as he answers questions from a panel of lawmakers, including those who campaigned for Britain to leave the EU. With the data pointing to resilience, he may be asked whether he acted too quickly in response to the referendum result, did too much, or went too far with his pre-vote warnings.

Still, the need for caution was underlined by separate PMI figures Monday showing the euro area -- the destination for more than 40 percent of British exports -- lost momentum in August. U.K. Prime Minister Theresa May, who is in China for the Group of 20 summit, warned over the weekend that there are “difficult times ahead” for the U.K. economy.

Cost Pressures

“The survey should be treated with some caution,” said Scott Bowman, an economist at Capital Economics Ltd. in London. “Just as the July survey probably overstated the economy’s underlying weakness, the August survey probably overstates its subsequent recovery. An average of the July and August surveys paints a more accurate picture of the economy post-Brexit.”

The services survey found that an index of new work rose to a four-month high, with companies citing increased export sales, stronger domestic tourism demand and improving confidence.

It also showed growing inflationary pressure as the decline in the pound pushed up import costs. Service providers raised prices sharply in August in response to the fastest growth in input costs in almost three years.

While business expectations recovered most of the ground lost in July, they are still weak by historical standards, Markit said.

“Business confidence is still at one of its lowest levels seen over the past four years,” Williamson said. “Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth.”

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(Adds Carney’s appearance in front of parliamentary panel on Wednesday.)
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