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UK economic growth boosted by services sector

UK economic growth gathered pace in October, underpinned by the services sector, as supply shortages hit manufacturing and cost inflation reached a new record high, according to a survey released on Friday.
The IHS Markit/CIPS flash composite output index, which measures activity in the manufacturing and services sectors, rose to a three-month high of 56.8 from 54.9 September. This was above consensus expectations for a reading of 54.0.

A reading over 50.0 indicates expansion, while a reading below signals contraction.

The manufacturing output index fell to an eight-month low of 50.6 in October from 52.7 the month before. This marked the weakest output performance for eight months, with manufacturers highlighting difficulties meeting customer demand due to capacity constraints resulting from lengthy supplier lead times and shortages of staff.

Around 64% of UK manufacturers reported worsening supplier delivery times in October, with only 1% seeing an improvement.

The survey found that higher wages and worsening supply shortages resulted in a rapid pace of input cost inflation during October. The latest rise in average cost burdens was the fastest since the index began in January 1998.

The services index, however, rose to a three-month high of 58.0 from 55.4 in September.

Chris Williamson, chief business economist at IHS Markit, said: “The UK economy picked up speed again in October, but the expansion is looking increasingly dependent on the service sector, which in turn looks prone to a slowdown amid the recent rise in Covid-19 cases.

“Growth is also being accompanied by an unprecedented rise in inflationary pressures, which will inevitably feed through into higher consumer prices in coming months.

“The news comes at a time when the Bank of England is already leaning towards hiking interest rates to safeguard against inflationary expectations becoming entrenched. The record readings of the PMI survey’s price gauges will inevitably pour further fuel on these inflation worries and add to the case for higher interest rates.”

Pantheon Macroeconomics said that on balance it still reckons the MPC will take a rain check in November, given the “high option value” in waiting to see how the labour market has faded following the withdrawal of the furlough scheme.

“Note that a high proportion of workers still furloughed in September previously worked for small businesses, which likely are under-represented in Markit’s survey, and many businesses probably didn’t consider furloughed staff in September as still employed,” said chief UK economist Samuel Tombs.

“Nonetheless, the November decision clearly is now ‘live’, as the BoE Chief Economist Huw Pill stated in an interview with the Financial Times yesterday, and at least three MPC members look set to vote to hike Bank Rate at that meeting.”

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