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Services sector rebounds to growth after Brexit jitters

The service sector returned to growth in August following abrupt contractions in output and new business in July linked to disruption related to the result of the EU referendum, according to new research.

The Purchasing Managers' Index from IHS Markit and the CIPS also found that business outlook has recovered most of the ground lost in July when confidence took a knock from the Brexit vote amid political and economic uncertainty, although they remained weak by historical standards.

The Business Activity index climbed from 47.4 in July to 52.9 last month, above the 50-point threshold indicating overall growth. The month-on-month rise, at 5.5 points, was the largest in the survey's 20-year history and followed a 4.9-point drop in July.

The rate of expansion was the fastest since May, but weaker than the long-term survey average. The renewed expansion of activity was supported by a resumption in growth of new business, which rose at the fastest pace in four months, having fallen at the strongest rate since March 2009 during July.

Companies linked greater demand to new clients, higher export business linked to the weak pound, higher domestic tourism and returning confidence following initial disruption related to the Brexit vote. New business growth was weaker than the long-run survey trend, but sufficiently strong to generate a rise in outstanding work at service providers for the first time in five months.

Job creation also resumed in August following a pause in Jul, although the pace of growth was weak.

Service sector confidence returned to its pre-referendum level in August, having spiked lower in July. Firms linked positive output expectations over the next 12 months to export opportunities, reduced uncertainty, stable markets, product launches, expansion plans and a recovery in the energy sector. The overall strength of sentiment nevertheless remained relatively subdued amid reports of ongoing uncertainty related to Brexit.

Input price inflation accelerated to a 33-month record in August, linked to the weak pound and rising fuel and labour costs. Service providers raised their own prices at the sharpest rate since January 2014.

Chris Williamson, chief business economist at IHS Markit, said: "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.

"The three PMI surveys point to a stagnation of the economy so far in the third quarter, meaning much hinges on the September data to see whether the economy contracts or ekes out modest growth.

"It remains too early to say whether August's upturn is a dead cat bounce or 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. 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.

"Uncertainty has certainly eased considerably, helped by the swift settling-in of a new government and central bank stimulus. However, although improving on July’s seven-year low, business confidence is still at one of its lowest levels seen over the past four years. Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth."

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