Pound rises as UK services sector returns to growth

Britain's powerhouse services sector bounced back last month, as output beat expectations and returned to growth following July's shock contraction.

The closely-watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 52.9 in August, up from 47.4 in July and above economists' expectations of 50.0.

A reading above 50 indicates growth.

The pound rose 0.4% against the dollar following the update to 1.335 US dollars. Sterling was also up 0.3% against the euro at 1.194 euros.

The services sector, which accounts for around 79% of the UK economy, recorded its first contraction since December 2012 in July - while activity recorded its steepest decline for more than seven years, as Brexit uncertainty took its toll on the industry.

However, the sector swung back to growth in August as companies reported that uncertainty had eased.

The report said the month-on-month gain of 5.5 points was the biggest leap since the survey began 20 years ago.

Output picked up after new work grew at its fastest pace for four months, after the pound's slump to 31-year lows following the EU referendum result lifted the demand for exports and bolstered UK tourism.

The sector also saw confidence return to its pre-Brexit vote levels, while employment also notched up in August following a pause in July.

Businesses in the industry were feeling more confident about export opportunities, stable markets and reduced uncertainty, while some were lifted by signs of recovery in the energy sector, the report said.

However, the weaker pound ramped up costs to a near three-year high, causing services firms to bump up their prices at the fastest rate since January 2014.

The rebound comes after a surprise swing in manufacturing output in August, notching up its highest monthly rise in a quarter of a century.

The UK construction industry also showed signs of recovery last month as activity picked up from July's seven-year low.

Chris Williamson, chief business economist at IHS Markit, said the record rise in services builds on the last week's positive PMI reports for construction and manufacturing.

This suggested that the UK economy may avoid an imminent recession, he said.

"The three PMI surveys point to a stagnation of the economy so far in the third quarter, meaning much hinges on the September data to see whether the economy contracts or ekes out modest growth," said Mr Williamson.

"It remains too early to say whether August's upturn is a dead cat bounce or the start of a sustained post-shock recovery, but there's plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate.

"Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to "Buck Brexit" and carry on regardless."

The UK economy continued to grow in the run up to the Brexit vote, with gross domestic product (GDP) growing 0.6% in the second quarter, up from 0.4% in the first three months of 2016, the Office for National Statistics confirmed last month.

The ONS also reported that output for the services sector grew by 0.2% between May and June, picking up from flat growth between April and May.

The return to growth was a welcome vote of confidence in the country's financial prospects, said Laith Khalaf, senior analyst at Hargreaves Lansdown, speaking about the PMI report.

"Brexit is going to be a lengthy process, with plenty of ups and downs along the way, so economically speaking it's still way too early to start counting any chickens just yet," he added.

"It's also worth bearing in mind that dramatic bounce-backs are often a reflection of the depths of previous despair, rather than of optimism over the future.

"In terms of services output, today's reading is simply in line with survey results earlier in the year, and it is last month's sharply negative reading which is the outlier."