Recession fears 'fade' as UK's service sector grows

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City of London skylineImage source, Getty Images

The UK's services industry rebounded strongly in August, suggesting the country will "avoid recession", according to a closely-watched survey.

The Markit/CIPS purchasing managers' index (PMI) showed activity in UK services recorded the biggest month-on-month rise in the survey's history.

The index rose from 47.4 in July to 52.9 in August. A score above 50 indicates growth.

It effectively takes services back to pre-referendum levels, Markit said.

The PMI is a survey of business managers, gauging whether their firm's activity has increased compared with the previous month.

The return to growth for the services industry - which accounts for nearly 80% of the UK economy - adds to signs of recovery in manufacturing and construction last month.

There had been fears of two consecutive quarters of falls in economic growth - the usual definition of a recession - but Chris Williamson, chief economist at Markit, said the survey findings suggested there would be a modest 0.1% expansion in GDP in the three months to September.

'Buck Brexit'

Sterling rose sharply after the release of the PMI survey, rising 0.6% against the dollar before falling back slightly to just over $1.33.

Last month's recovery in services wiped out a shock fall in July following the Brexit vote.

"A record rise in the services PMI adds to the encouraging news seen in the manufacturing and construction sectors in August to suggest that an imminent recession will be avoided," Mr Williamson said.

It is still too early to call the "start of a sustained post-shock recovery, but there's plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate", he said.

He added: "Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to 'Buck Brexit' and carry on regardless."

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Computing and IT, financial services, hotels and restaurants contributed to the recovery, according to the survey.

"The services PMI completes a triple-whammy of good economic data for the UK in the last three trading sessions and indicates that businesses are returning to normal after the initial shock of the vote rocked confidence," said Neil Wilson, a financial market analyst at ETX Capital.

'Overstates recovery'

Other analysts, however, warned the PMI findings should be treated with some caution.

"Just as the July survey probably overstated the economy's underlying weakness, the August survey probably overstates its subsequent recovery," said Scott Bowman, UK economist at Capital Economics.

Growth in services was already subdued before the EU referendum, with a score of 52.3 in June - the lowest in more than three years.

Meanwhile, manufacturing body EEF says output from Britain's factories slowed down in the last three months and is unlikely to grow until the end of year.