World Economy

UK Service Sector Sees Biggest Rebound in 20 Years

Business confidence has rebounded strongly  in the UK.Business confidence has rebounded strongly  in the UK.

The UK service sector, which includes transport, communication, financial services, IT, hotels and restaurants, rebounded in August. This indicates that the economy recovered after confidence took a knock following the Brexit vote.

After the June 23 vote, the headline business activity of the Markit/CIPS survey of purchasing managers index fell to its lowest level since the financial crisis, but in August it recorded its largest month-on-month gain in its 20-year history, Money Observer reported.

The index rose from 47.4 in July to 52.9 in August, signaling a rise in UK services output. Readings over 50 signal growth of activity, while readings below 50 signal contraction.

The optimistic data comes after similar increases in consumer confidence, and it may indicate that an ‘imminent recession will be avoided’, says Chris Williamson, chief business economist at Markit.

 Brexit-Related Concerns Persist

But he cautions that it remains too early to say whether August’s upturn is a ‘dead cat bounce or the start of a sustained post-shock recovery’.

Uncertainty has eased considerably, helped by the swift settling in of a new government and central bank stimulus, he says. Although it is an improvement on July’s seven-year low, business confidence is still at one of its lowest levels seen over the past four years.

Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, he adds, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth.

Reacting to this new dose of optimism, sterling rose two-thirds of a cent against the dollar to $1.336 after the report was published on Monday.

“Business confidence has rebounded strongly in the UK following the initial shock of the vote to leave the EU. The figures follow on from strong manufacturing PMI figures last week. Both indicate the UK is moving from contraction into expansion.

“However, investors should be careful of reading too much into the confidence figures as they are likely to have overshot, as businesses gave a sigh of relief that things did not turn out as bad as expected,” says Adrian Lowcock, investment director at Architas.

Lowcock points out that the UK economy could be entering “a bit of a sweet spot” as it benefits from the fall in the pound as well as the central banks’ interest rate cut and quantitative easing. At the same time the UK could remain in the single market until the end of the decade.