Services sector rebounds despite new business slowdown

The UK economy looks set to stutter in the third quarter despite the services sector rebounding in September from an 11-month low.

The closely watched Markit/CIPS services purchasing managers' index (PMI) showed a reading of 53.6 last month, up from 53.2 in August and above economists' expectations of 53.2.

A reading above 50 indicates growth.

While the powerhouse industry served up a better performance than August, new business growth still slumped to a 13-month low.

It comes after the manufacturing industry eased back in September, while the construction sector contracted for the first time in 13 months.

Chris Williamson, chief business economist at IHS Markit, said the PMI results pointed to third quarter economic growth of 0.3%, in line with the quarter before.

He said: "The services sector saw another month of modest growth, running in the middle ground between the robust expansion seen in manufacturing and the contraction recorded in construction.

"The three PMI surveys put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth.

"Across all three sectors, inflows of new business in September were the lowest for 13 months, and business optimism about the year ahead slipped lower."

Lacklustre demand across the UK dragged on the services sector last month, while Brexit uncertainty caused some firms to put major projects on ice.

Businesses were also feeling more gloomy about the future, with the balance of firms expecting business activity growth over the next year slipping to its lowest level since June.

Cost pressures were biting in September, touching a seven-month high and causing the prices charged by services firms to jump at the fastest rate since April.

However, job creation was robust over the period, recording a marginal fall from a 19-month high in August.

Howard Archer, chief economic adviser to EY ITEM Club, said: "Overall, a weakened set of September purchasing managers' surveys fuel concern that an already lacklustre UK economy could be faltering.

"At the very least, the September purchasing managers' surveys dilute hopes that the economy saw some improvement in growth during the third quarter after expansion of 0.3% quarter-on-quarter in both the second and first quarters.

"The September purchasing managers' surveys provide the Bank of England with conflicting influences as the MPC ponders a November interest rate hike.

"Higher prices charged will fuel the MPC's inflation concerns, but the committee will also likely be concerned by signs of faltering economic activity."

The pound was up 0.3% against the US dollar at 1.32 following the announcement, and 0.1% higher versus the euro at 1.12.