Business

UK service sector growth remains strong

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Image caption The UK's services sector continued to expand in June

The UK service sector continued to grow at a steady pace in June, pointing to a further strengthening of the economy in the first half of 2014.

The Markit/CIPS services purchasing managers' index (PMI) registered 57.7, down from May's reading of 58.6 but still well above the measure of 50 which indicates expansion.

The survey also said employment in the sector grew at a record pace.

The services sector accounts for about three quarters of UK economic growth.

'Firing on all cylinders'

The PMI survey also indicated that business volumes in the service sector rose at the fastest pace for six months.

Markit chief economist Chris Williamson said the services sector index taken together with strong construction and manufacturing data published earlier this week suggested economic momentum was holding.

"Alongside an ongoing surge in construction and the largest quarterly rise in manufacturing output for 20 years, the services PMI confirms that the economy is firing on all cylinders," Mr Williamson said.

He said the data pointed to UK growth of 0.8% in the second quarter, building on economic growth of 0.8% in the first three months of the year.

Mr Williamson said that this made it more likely than not that an interest rate rise would occur later this year rather than in 2015.

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Image caption The construction and manufacturing sectors have also seen strong growth

"The persistent strength of the PMI surveys raises the likelihood of policymakers deciding that a pre-emptive rise in interest rates later this year is warranted, especially given the speed at which the labour market is improving," he said.

Mixed signals

Bank of England officials have given mixed signals on the timing of a potential interest rate rise.

Last week, MPs accused Bank of England governor Mark Carney of being an "unreliable boyfriend" after he suggested interest rates could rise by the end of this year and then appeared to row back on idea the following week.

Mr Carney said there may be more "spare capacity" in the economy than the Bank originally estimated in its February Inflation Report, adding policymakers think more slack may need to be used up before that happens. The Bank is particularly concerned by the slow rate of increase in average wages.

He told the BBC that markets were too focused on when interest rates would rise, rather than the point they would ultimately settle at, adding interest rates could rise to a "new normal" of 2.5% by the end of the first quarter of 2017.

Wage rises

David Tinsley, UK economist at BNP Paribas, said if the survey's employment figure was reflected in the official data, "then it appears we are set to see even larger falls in unemployment ahead".

"The knock-on impact of more payrolls should support consumer spending over coming quarters," he added.

Howard Archer, chief UK and European economist at IHS Global Insight, pointed out the Markit survey noted reports of rising wages as the service sector labour market tightened.

"This fuels the belief that earnings growth will trend up over the coming months despite the relapse in April reported by the Office for National Statistics," he said.

"This would be good news for consumers' purchasing power and would boost growth prospects."

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