Solid UK services survey helps justify rate hike

An increase in new orders contributed to rising confidence among manufacturers about future demand

An increase in new orders contributed to rising confidence among manufacturers about future demand Ben Birchall PA

Activity in the United Kingdom construction sector unexpectedly grew last month but confidence about future work has dropped to the lowest level in almost five years, according to a respected survey.

Although input cost inflation eased to a 13-month low in October, businesses were paying more for salaries and imported goods, with those costs passed on to consumers at the fastest rate since April.

The IHS Markit/CIPS UK services purchasing managers' index climbed to 55.6 in October from 53.6 a month earlier, beating the consensus forecast for a fall to 53.3.

Despite the uptick in the services sector, the Caixin China Composite Output Index, which covers manufacturing and services companies, fell to 51.0 - the weakest expansion in 16 months - from 51.4 in September, hit mainly by a slowdown in production by manufacturers, the survey showed.

In July and August, the index was below the 50-mark that separates growth from contraction.

The PMI data point to the economy growing at a quarterly rate of 0.5 percent, representing an encouragingly solid start to the fourth quarter, Chris Williamson, chief business economist at IHS Markit, said.

"The latest PMI surveys brought mixed news on the United Kingdom economy at the start of the fourth quarter, and highlight the uncertain path for future central bank policy", said IHS Markit economist Chris Williamson. Economists had expected the index to drop to 54.8.

The services sector - which includes finance, real estate services, marketing, transportation and retailing - has become an increasingly important part of the Chinese economy, reflecting a shift away from traditional heavy-industry manufacturing and exports. "We envisage a second hike in the second quarter of 2018".

He said the indication that the PMIs gave of quarter-on-quarter GDP growth edging up to 0.5% "points to some upside risk to the MPC's estimate in November's Inflation Report that GDP will rise by 0.4%".

Service business activity stayed flat in October as employment rose and new business didn't grow as strongly as in recent months.

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