Services sector output 'grew strongly' in July despite Brexit vote

Output in Britain's powerhouse services sector "grew strongly" in July, defying expectations of a substantial slowdown in the wake of the Brexit vote.

Official figures showed that services output expanded by 0.4% in the first month after Britain voted to leave the European Union, driven by rising retail sales, a robust performance from the film industry and computer programming.

The update came as the Office for National Statistics (ONS) revised up its reading for the UK economy, with gross domestic product (GDP) growing 0.7% in the second quarter, up from a previous estimate of 0.6% for the period.

The ONS said the revision was triggered by a better performance from services and investment in the three months to June.

However, Britain's yawning current account deficit - which measures the amount of money flowing in and out of the economy - grew to £28.7 billion in the second quarter, up from £27 billion in the first three months of the year.

Darren Morgan, head of GDP at the ONS, said the fresh data shows there is "no sign of an immediate shock to the economy" from the EU referendum result.

"Despite some very weak indicators appearing in the immediate aftermath of the referendum, estimates gathered by the ONS from more than 23,000 firms now suggest that the services sector, which accounts for three quarters of the economy - in fact grew strongly in July.

"Further information also suggest that the whole economy also grew slightly more strongly in the months before polling day than previously thought."

Economists were forecasting services sector output to slow to 0.1% in July, from 0.2% in June, following a shock fall in output from the services' purchasing managers' index (PMI) in the first month after the Brexit vote.

It comes as official figures for the construction industry showed that output flat-lined in July, while manufacturing saw a sharp month-on-month contraction over the period, falling 0.9%.

Fresh data from the ONS showed household spending rose by 0.9% in the second quarter, but growth in disposable income hit 0.6% in the three months to June, down from 0.8% in the first quarter.

The household savings ratio - the share of household income not spent - came in at 5.1% in the second quarter, its lowest level since 2008. 

But business investment was revised up to 1% between the first and second quarter, from a previous estimate of 0.5% growth.

Howard Archer, chief UK and European economist at IHS Global Insight, said the buoyant result from the services sector provides a "significant boost" to the UK economy's third quarter growth prospects.

"The economy has shown resilience so far in the aftermath of June's Brexit vote, helped significantly by consumers' willingness to keep on spending amid still decent fundamentals, and the weakened pound lifting foreign orders for UK goods and services," he said.

"This resilience has helped consumer (especially) and business confidence rebound from their July lows."

Scott Corfe, director at the Centre for Economics and Business Research (CEBR), said the results for services come as a "huge sigh of relief". 

However, he said: "Economic growth has been partly driven by UK consumers becoming less cautious and saving less.

"This could easily unravel in the face of headwinds that cause consumers to adopt a more cautious attitude - such as the significant degree of economic uncertainty that is likely to be seen over the coming years, both Brexit-related and otherwise."

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