15th September 2016Are we being served? UK service industries bounce back

The Business Activity Index rebounded to 52.9 in August, from 47.4 in July signalling a rise in UK services output and a return to growth. The gain was significant and the largest month-on-month rise seen over the 20-year history of the index. These figures follow on from similar welcome news for the manufacturing sector recently demonstrated by the PMI.

July had seen an abrupt downturn in the services sector PMI results, due largely to the uncertainty following the outcome of the EU vote, so August’s figures mark a welcome return of confidence to pre-referendum levels. Companies surveyed were quick to point to new clients, higher domestic tourism and the benefits to exports resulting from the dramatic fall in the value of the pound.

Experts have been equally quick to comment that in all likelihood, what the figures show is no more than a collective sigh of relief that the events, so far at least, have turned out better than expected. However, the lower value of the pound, the cut in interest rates and the introduction of more quantitative easing have obviously played their part in making businesses feel more upbeat about their prospects, and given rise to renewed determination to make Brexit work.

Why services matter so much to the UK

There are three key sectors of the economy that act as the engines of UK business growth -manufacturing, financial services and business services. Between them, they account for over 70% of UK exports. They also have much higher Gross Value Added (GVA) – a major measure of economic output – per job than other parts of the economy. Any good news relating to these sectors also spells good news for the growth of the UK economy as a whole.

Since mid-2009, when UK growth resumed after the financial crisis, services industries have been the main engine of recovery and a major driver of employment growth, creating hundreds of thousands of jobs nationwide. The service sector now accounts for almost 80% of the economy and is the only sector of the economy that exceeds its pre-recession size.

The uncertain road ahead

This encouraging news has lead economists to speculate that the UK may escape the much-heralded post-Brexit recession. Whether UK economic confidence remains at this level will depend largely on what happens once the fundamentals of the terms on which the UK will exit the EU are unveiled.

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E advice@hwfisher.co.uk


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