Services sector continues to perform strongly in wake of Brexit vote

The UK's powerhouse services sector shows no signs of being held back by the UK's Brexit vote growing markedly last month, a new report said.

The services sector grew to 54.5 in October, from 52.6, signalling the fastest expansion since January, according to the Markit / CIPS UK Services PMI index. A mark above 50.0 denotes expansion.

The sector was boosted by new contracts wins, which rose at the fastest rate in nine months.

However, the report did note that the weak pound led to the highest month-on-month rise of inflationary cost pressures in the sector since the survey began 20 years ago. It added that input price inflation surged to the highest since March 2011.

The service sector accounts for more than 75% of the UK economy.

Sterling has fallen by around 15% since the UK's vote to leave the European Union on 23 June.

Chris Williamson, chief business economist at IHS Markit, said: "An encouraging picture of the economy gaining further growth momentum in October is marred by news that inflationary pressures are rising rapidly."

He added: "The ugly flip-side of the weaker pound is clearly evident, however, with the rate of increase of service providers' costs showing the largest monthly acceleration seen in 20 years of survey data collection. Costs are consequently rising at the fastest rate for over five years.

"If sustained, the increase in prices threatens to curb both corporate hiring and consumer spending, as firms seek to reduce staff costs and households see their pay eroded by rising inflation."

Inflationary pressures

IHS Global Insight chief UK and European economist Howard Archer said: "October's improved services survey from the purchasing managers – showing activity at a nine-month high - points to the UK economy starting off the fourth quarter pretty well after resilient expansion of 0.5% quarter-on-quarter in the third quarter following June's Brexit vote."

Archer added: "While the economy has seemingly started off the fourth quarter pretty well, we still suspect that it will find life an increasing struggle during 2017 - as the fundamentals for consumers weaken markedly and as uncertainty is fuelled by Article 50 being triggered by the end of March and likely very difficult negotiations with the EU increasingly come to the forefront."

Capital Economics UK economist Ruth Gregory said the services sector had got off to "a good start" in the final quarter of the year.

But Gregory added: "Of course, that is not to say that we won't see a further weakening in growth ahead given that slower employment growth and real wages could dampen household spending growth and uncertainty may weigh on investment."

Later today (3 November) the Bank of England will set interest rates – currently at 0.25% - and will give its latest forecasts for the UK economy in its quarterly inflation report.