Economic boost as services ‘blow the doors off’

Britain’s recovery accelerated over the summer and the dominant services sector “blew the doors off” in August with its fastest growth for more than six years, economists said today.

The pace of the UK’s economic revival has caught the City by surprise and comes a month after new Bank of England Governor Mark Carney said it was so weak that it would be three years before interest rates can be increased.

But today forecasters said that GDP could grow by as much as one per cent in the three months to the end of September raising the possibility that the cost of borrowing might have to go up much sooner.

The reassessment came after the widely watched PMI index for confidence in the service industry — which accounts for more than three quarters of the economy — hit its highest level since December 2006.

The index stood at 60.5 last month, up from 60.2 in July, a far better performance than expected. The last time it was above 60 for two months running was in the boom years of the mid-Nineties, when the economy was growing at close to four per cent.

Paul Smith, senior economist at Markit, the research company that compiles the index, said: “The UK service sector turned in another stellar performance in August, building on the growth momentum seen during July. Moreover, the sector’s recovery, which has been evident since the start of the year, has legs.”

Today’s figures followed equally strong data earlier this week for the other two main components of the economy, manufacturing and construction.

It continues a run of better than forecast economic news stretching back to the spring.

A combination of record low interest rates, the Government’s Funding for Lending scheme for the banking sector, rising house prices and a general lift in mood perhaps aided by good weather, sporting success and the royal birth all seem to have contributed to the turnaround.

Rob Wood, chief UK economist at investment bank Berenberg, said: “Business optimism is heading ever higher and higher and the economy seems to be flying, as the UK rapidly puts the quagmire of the past couple of years firmly in the rear-view mirror.”

The “composite” version of the Markit/CIPS PMI index, which covers the whole economy, rose to 60.7 in August from 59.5, its highest level since the series began in 1998.