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UK services sector growth recovers in August, but Brexit dampens optimism

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UK services sector growth recovers in August, but Brexit dampens optimism

U.K. services sector activity expanded at a faster pace in August amid stronger increases in business activity and new work, although optimism dipped to a five-month low amid prevailing Brexit uncertainty, a survey from IHS Markit and the Chartered Institute of Procurement & Supply showed.

The seasonally adjusted IHS Markit/CIPS U.K. services PMI business activity index rebounded to 54.3 in August after falling to 53.5 in July. This marked the second-highest reading since February and was slightly above the average seen over the past two years, during which it has remained above the 50.0 no-change mark each month.

"Faster service sector growth comes as much-needed welcome news after disappointing manufacturing and construction PMI surveys in August," said Chris Williamson, chief business economist at IHS Markit. "The survey data indicate that the economy is on course to expand by 0.4% in the third quarter, a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month."

While incoming new work grew at a slightly accelerated rate since July, it was still relatively softer than the expansionary trend seen since August 2016. The survey cited uncertainty surrounding the U.K. leaving the EU as curtailing business-to-business spending, especially on large-scale projects.

Business optimism dipped to its weakest since March even as service providers saw an uptick in new orders due to worries over Brexit's near-term impact on clients' business investment plans, according to the survey. "Struggles around securing talent and the right skills were also a drag on a sector highly dependent on trained staff even though job creation rose to its highest levels for half a year," added Duncan Brock, group director at CIPS.

Service firms reported a sharp and accelerated increase in average cost burdens, but were reluctant to pass on costs to consumers amid intense competition, as seen in prices charged inflation remaining modest and well below the peak seen in November 2017, IHS Markit and CIPS said.