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U.K. Economy Maintains Solid Growth Momentum as Services Surge

  • Index of activity rises to highest level in 17 months
  • Markit surveys point to 0.5% quarterly economic growth

The U.K.’s services sector unexpectedly grew at the fastest pace in more than a year in December, reinforcing the economy’s strength at the end of 2016.

A measure of the biggest part of the economy rose to 56.2 from 55.2, according to IHS Markit’s Purchasing Managers Index. That’s well above the 54.7 forecast by economists and the 50-mark that divides expansion from contraction.

Together with reports on manufacturing and construction, Markit said the figures point to U.K. economic growth of 0.5 percent in the fourth quarter, close to the pace recorded in the previous three months. The composite PMI for all three sectors rose to the highest since July 2015.

While the latest surveys paint a picture of an economy showing continued resilience to the June vote to leave the European Union, there are risks on the horizon. Business sentiment among services companies remains below its long-run average, with respondents citing Brexit and upcoming European elections as sources of uncertainty.

Inflationary pressures are also continuing to build due to the weakness of the pound and higher food and fuel costs. Prices charged by companies rose at the strongest rate since April 2011, according to the survey.

That was echoed in a separate report on Thursday from the British Chambers of Commerce, which said U.K. businesses will have no choice but to raise prices as costs increase. The pressure is greatest on manufacturers, with the balance of companies expecting to pass on higher costs rising to the highest since records began in 1989. The measure for services was at the highest since 2011.

Accelerating inflation poses a challenge for Bank of England policy makers, who still expect economic growth to cool this year after cutting their key interest rate to a record-low after the Brexit referendum. Guidance that they could lower rates again was dropped late last year amid a changing outlook.

“This improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut,” said Chris Williamson, an economist at Markit in London. “But policy makers are clearly concerned about the extent to which Brexit-related uncertainty could slow growth.”

With just a few months until the U.K. begins formal exit negotiations, firms are still in the dark about what shape Brexit will take. Prime Minister Theresa May has faced criticism this week that she’s overseeing a vacuum on Brexit policy, with her ambassador to the EU quitting over alleged shortcomings in the government’s preparations.

Williamson said the BOE will consider the “current resilience of the economy alongside the elevated levels of uncertainty.” It announces its next policy decision and publishes new forecasts on Feb. 2.

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