By Daniel Hunter

The UK service sector maintained its recent run of strong growth during October, with activity expanding at the fastest pace since May 1997 as levels of incoming new business rose at a survey record rate.

Capacity was subsequently tested, with backlogs increasing at a sharp pace. Companies responded by adding to their payrolls, and the rate of growth was the best seen in nearly sixteen-and- a-half years.

The headline seasonally adjusted Business Activity Index reached a level of 62.5 in October. That was an improvement on September’s 60.3 and represented the sharpest rise in activity signalled by the survey since May 1997.

Service sector activity has risen continuously throughout 2013 to date and generally at an accelerated rate. This has largely been the result of rising levels of incoming new business placed with service providers as market sentiment has improved in line with a strengthened economic climate.
October was no different.

Latest data showed incoming new work rising at the sharpest rate recorded in the survey history (data have been collected since July 1996). Additional marketing was reportedly a factor helping firms take advantage of the improved business environment.

Sharply rising volumes of new business added to capacity pressures at UK service providers. Backlogs of work increased for a seventh successive month, with the rate of growth the strongest recorded since May 1997.

Markedly higher workloads encouraged companies to add to their payroll numbers in October. The rate of growth was also the best since May 1997 as panellists sought to service contracts in a timely fashion and fill recently created vacancies. Employment has now risen for ten months in succession.

Companies also retained a positive outlook, with over 50% of panellists indicating expectations of a rise in activity from present levels in 12 months’ time. The recent strengthening of demand and activity underpinned confidence, with growth in the coming year expected to come from both domestic and overseas sources. There were also some mentions that an improved performance of the UK property market is also likely to bolster activity.

On the price front, rising energy, fuel and utility bills drove up input cost inflation to the highest in eight months. Wages were also reported to be higher on average.

Service providers responded with modest price increases of their own. Output charges rose in October for the fifth month in succession and at the strongest pace since May 2011.

Chris Williamson, Chief Economist at survey compilers Markit: “The UK economic recovery moved up a gear again in October, with the PMIs indicating record growth of output and employment. The all-sector PMI, measuring business activity across the UK private sector economy, hit an all-time high of 61.5 in October, up from 60.2 in September.

“Historical comparisons of the PMI against gross domestic product suggest the latest survey data are consistent with a 1.3% quarterly rate of GDP growth, up sharply from previous quarters. The surveys also indicate that the rate of private sector job creation is currently running in excess of 100,000 per quarter.

“Manufacturing, services and construction all continued to see very strong rates of expansion, pointing to an ongoing broad-based upturn. However, it is the services sector which — due to its sheer size — is the major driving force behind economic growth at the moment.

“The buoyant survey data are likely to encourage the Bank of England to raise its forecasts for economic growth when it publishes its new
Service providers responded with modest price increases of their own. Output charges rose in October for the fifth month in succession and at the strongest pace since May 2011.

"Employment levels rise at fastest rate in nearly sixteen-and-a-half years
projections in November. The Bank is also likely to bring forward its expectation of when unemployment will fall below 7%, the threshold needed to be reached before the Bank will consider raising interest rates.”

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