The UK’s services sector is growing again, but Ukraine’s prospects are clouded

LONDON (Reuters) – Britain’s services sector grew at its fastest pace in almost a year last month, a survey showed on Wednesday, but some signs suggest the Ukraine crisis may soon calm down. The monthly Markit/CIPS purchasing managers’ index for the services sector also suggested some companies were struggling to keep up with demand, which the Bank of England is likely to note as it considers when to raise interest rates. The PMI rose to 60.5 in August from 59.1 in July, above even the highest forecasts of economists in a Reuters poll. The strength of services contrasts with a slight cooling in the country’s factory sector, which has raised concerns about further escalation of the conflict in Ukraine. A survey of the industrial processing sector published at the beginning of the week showed that in August the growth rate fell to the lowest level in 14 months. However, the jump in services was so large that the composite PMI for the entire British private sector reached its highest level since November. The survey could undermine the Bank of England’s forecast repeated in August that the economy would slow slightly in the second half of 2014. Two BoE policymakers broke ranks and voted last month to raise interest rates in response to the strong recovery in the British economy. The bank is closely monitoring signs of rapid depletion of spare production capacity in the economy. Some service firms surveyed said they did not have enough workers, but wage growth was the slowest since March, suggesting employers may struggle to hire adequate staff. Despite the economic recovery, the BoE is likely to keep interest rates on hold at its September policy meeting, which ends on Thursday. Economists mainly predict a rise in interest rates only in early 2015. Chris Williamson, Markit’s chief economist for PMIs, said the August PMI surveys suggest the British economy will grow at a rate similar to the 0.8% quarterly rate seen in the first two quarters br. year, well above the long-term average of 0.5-0.6%. However, export weakness has increased the risk that the UK will rely too heavily on domestic demand to sustain its economic recovery, which will weigh on the BoE, he said. “Dovish policymakers will worry that the crisis in Ukraine will also translate into a significant slowdown in services and construction,” Williamson said. “Some impact is already visible, with new orders rising and employment falling in all three sectors in August.” In the services sector, new business rose at its weakest pace in three months and overall confidence in the sector fell to a 15-month low on some concerns about the strength of business pipelines, Markit said. The BoE can console itself with almost no increase in prices charged by companies in the services sector. The PMI survey covers private sector service companies, excluding retailers, and represents almost half of the economy. (Reporting by William Schomberg; Editing by Hugh Lawson)