Activity in the UK’s services sector bounced back in October from the 2-year low it hit in September. It was the first time in four months that activity increased but remains below levels seen since the second half of 2013. The Markit Services PMI rose sharply to 54.9 in October from 53.3 in September, which was the lowest since May 2013. Consensus estimates were for a reading of 54.5.
Despite the strong rise, the rate of new business growth did not improve from the September low and 12-month expectations fell to a 2½-year low. It was good news for employment though as job creation in the service sector rose to a 5-month high.
The improvement in October’s services PMI adds to the positive manufacturing and construction PMIs seen earlier in the week. This points to an acceleration of GDP growth at the start of the fourth quarter. UK growth slowed to 0.5% in the third quarter according to initial estimates, below the Bank of England’s forecast of 0.6%. The softening growth outlook and persistently low inflation have cast doubt on whether the BoE would proceed with a rate rise as early as the first quarter of 2016.
Across the continent, the Eurozone’s services sector also rose in October, maintaining the momentum seen since the start of the year. Although the final services PMI reading of 54.1 was below the preliminary estimate of 54.2, solid growth was reported in the big-four economies, Germany, France, Italy and Spain. In a further encouraging sign for the Eurozone, the rate of job creation rose to a 4½-year high.
The Markit composite PMI, which includes both services and manufacturing, rose to 53.9 in October, putting the Eurozone on track to record 0.4% GDP growth in the final quarter of the year. Ireland saw the strongest activity within the 19-member euro area even though the figure fell to a 20-month low of 57.7. Spain saw the biggest rise in output and new orders, while output in France was still lagging other Eurozone countries despite rising to a 4-month high.
The recovery in Eurozone growth would be seen as evidence by the European Central Bank that its quantitative easing program is having its intended effect on boosting lending and growth, even if inflation has yet to pick up. However, if economic indicators continue to surprise on the upside, the ECB may be reluctant to make significant changes, if any, to its current monetary policy when it meets in December.
Weak growth in China was one of the things threatening to derail Eurozone and UK recoveries in recent months but this has so far failed to materialize. The big increase in China’s services PMI in October might provide some assurance to those fearing that the Chinese economy is heading for a hard landing. The Caixin services PMI jumped to 52.0 in October from 50.5 the prior month and is the highest since July. A strengthening services sector should offset some of the weakness in the manufacturing sector, which remains sluggish.
The pound initially firmed on the data, rising to 1.5444 dollars, but later fell back to 1.5413 dollars. The euro was weaker after the Eurozone PMI as the final readings slightly disappointed versus the flash estimates. The single currency hit a low of 1.0913 dollars but recovered somewhat to 1.0927 dollars on higher-than-expected Eurozone producer prices data. Earlier in the day, the aussie was given a boost from the strong China PMI, helping it climb to 0.7223 against the US dollar.