The sun set on the golden era of UK heavy industry in the 1980s and only a small fraction of Britain’s once mighty manufacturing base remains. The UK had become uncompetitive in this arena against production in Asia. This sea-change in the UK economy saw the rise of the service sector as the new mainstay of Britain’s economy. The City has cemented its position as, arguably, the global financial hub – certainly, London sees the largest foreign exchange market in the world. Consequently, performance of the service sector is vital to the UK’s fortunes.
Data released for May suggests that job growth in the sector (which includes a diverse range of activities from catering, to entertainment and financial services) remained at a 17 year high in April. Whilst the recent Markit Purchasing Managers’ index slipped from 58.7 in April to 58.6 for May, it remains near historically high values, indicating the strength of the sector (any value above 50 indicates expansion).
Markit’s chief economist, Chris Williamson, suggested that the economy was on target for a Q2 growth figure of 0.8% which would restore it to above the pre-Global Financial Crisis level for the first time. Inevitably, reasonable performance from the economy sparks debate on the Bank of England’s interest rate policy. "With every strong PMI reading, the more lively the discussion will become among the Bank of England's Monetary Policy Committee that a pre-emptive early hike in interest rates is warranted," Mr Williamson commented. The Bank’s own forward guidance has ruled out a rate increase before next spring. The Bank of England’s Monetary Policy Committee will meet later today.
UK full year growth is expected to come in at 3%, making it one of the fastest growing Western economies. UK Q1 economic growth came in at its fastest rate for six years. Inflation is well under control, but concern has been expressed about UK property price growth. An increase in the Bank of England’s interest rate would increase mortgage costs and ought to cool the housing market – but 2015 is a general election year in the UK and higher mortgage costs does not feature on anybody’s “feel good factor” list, of course.