Business

UK service sector growth 'slows'

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Growth in the UK's dominant service sector slowed last month, according to a closely watched survey, while price pressures "remained intense".

The Markit/CIPS purchasing managers' index (PMI) recorded its first slowdown in the services sector for four months.

The index fell to 54.5 in January from the previous month's reading of 56.2.

However, a reading above 50 still indicates the sector is expanding, and Markit said the economy was on track for a "buoyant" start to 2017.

Similar surveys from Markit/CIPS released earlier in the week suggested a slight slowdown in activity in both the manufacturing and construction sectors.

But Markit said the surveys together suggested the UK economy would grow by a "robust" 0.5% in the first quarter of the year, if current trends continued.

On Thursday, the Bank of England revised up its forecast for the UK economy this year, and now expects it to grow by 2%.

Rising optimism

The health of the UK's service sector is monitored closely as it accounts for more than three-quarters of the economy.

Markit said the main positive finding from its latest survey of the sector was an increase in optimism about future prospects, which was at its highest since May last year.

However, once again firms reported inflationary pressures. Price inflation for goods bought by the companies hit the highest since March 2011, while inflation in prices charged rose at the same rate as December's 68-month high.

Firms are facing much higher prices for imported goods since the fall in the value of the pound since the Brexit referendum vote in June last year.

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"Service sector growth eased after a strong end to 2016, but the January surveys still point to a buoyant start to 2017 for the UK economy," said Chris Williamson, chief business economist at IHS Markit.

"Encouragingly, optimism about the coming year has risen to its highest in one-and-a-half years, improving across the board in all sectors to suggest that January's slowdown may only be temporary.

"The main area of concern is the extent to which companies' costs are rising across the economy, with the rate of inflation accelerating to a pace not seen since before the global financial crisis," he added.

"Higher costs are feeding through to increased selling prices, which will inevitably put upward pressure on consumer prices."

Latest official figures showed the annual rate inflation rose to 1.6% last month, up from 1.2% in November.

The Bank expects the weakness in the pound to push inflation to 2.7% next year, above its target rate of 2%.

Bank of England governor Mark Carney has said the Bank is prepared to tolerate inflation running above its target, but in the minutes from their latest meeting, members of the Monetary Policy Committee said they had moved "a little closer" to the limit of that toleration.

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