(Reuters) - Growth in Britain’s services sector slowed for the first time in four months in January, dipping just below its long-run average, as businesses battled the sharpest rise in costs in more than five years, a closely watched survey showed on Friday.
Britain’s economy unexpectedly outpaced all its major peers last year, wrong footing those who expected an immediate hit from June’s Brexit vote, and the spotlight is now on how resilient it will prove this year as price rises start to bite more.
On Thursday the Bank of England sharply revised up its growth forecast for 2017 to 2.0 percent - far stronger than most economists expect - after it highlighted a stronger global economy and more resilient consumers.
Friday’s data suggest any slowdown is likely to be gradual.
The Markit/CIPS services purchasing managers’ index (PMI) dropped to a three-month low of 54.5 last month from December’s 15-month high of 56.2, at the bottom end of a range of forecasts in a Reuters poll of economists.
This follows drops in PMIs for the smaller manufacturing and construction sectors earlier this week. Nonetheless, Markit said that together they still pointed to growth of 0.5 percent in the first three months of 2017, matching the BoE’s latest forecast.
“Optimism about the coming year has risen to its highest in one-and-a-half years, improving across the board in all sectors to suggest that January’s slowdown may only be temporary,” HIS Markit economist Chris Williamson said.
Services businesses said they were feeling more upbeat due to new orders, products and markets, as well as continued low interest rates and what they saw as more clarity about Britain’s exit from the European Union.
Britain’s parliament has given Prime Minister Theresa May an initial green light to start Brexit talks, though BoE Governor Mark Carney predicted many twists and turns in the negotiations over future trading arrangements with the EU, Britain’s biggest export market.
The BoE may take less comfort from the price pressures facing businesses.
Manufacturers had previously reported the sharpest rise in raw material costs on record, and services businesses on Friday said their costs were rising at the fastest since March 2011 due to sterling’s fall since the referendum.
“Anecdotal evidence widely attributed cost pressure to fuel, salaries, freight charges and imports,” Markit said. Businesses in turn raised the prices they charged, keeping up the rapid increases seen in December, which were the most widespread since April 2011.
“The degree to which costs are rising threatens to test the tolerance of some policymakers in terms of their willingness to ‘look through’ what’s likely to be a marked upturn in inflation in 2017,” Williamson said.
The BoE on Thursday forecast that inflation, which jumped to 1.6 percent in December, would reach 2.7 percent by the end of this year - fractionally lower than it expected three months ago, as a partial recovery in the pound mildly eased pressure.
Reporting by David Milliken; editing by John Stonestreet