Thriving Service Sector Could Rise Interest Rates

The pound has risen after a closely watched survey suggested that growth in the UK’s key services sector was faster than expected in May, renewing talk of a possible interest rate rise.

The service sector accounts for about 80 percent of the UK economy, incorporating all the restaurants, hotels and schools around the country. Consumer confidence has been historically low, with any sector that involves customer service suffering from low turnout and even lower profits. Recent national celebrations such as the Royal Wedding and the FA Cup have been lucrative for the sector, with sales of alcohol and food giving it a welcome boost. Along with lower inflation and interest rates, the general atmosphere on the high street has improved.

As the economy brightens, however, so does the possibility of an interest rate rise. An interest rate rise was initially expected back in May but was postponed to allow the economy to improve. Now with the service sector demonstrating positive behaviour a rise in August could be a strong possibility.

The purchasing managers’ index (PMI) from IHS Markit/CIPS hit a three-month high of 54.0, an advancement that has prompted a rise in the pound. While this suggests the economy has rebounded, the survey insists that growth could slow in the months ahead. Economic behaviour is by no means predictable, and as a result, a rate rise is not assured.

This unpredictability is something that all businesses should prepare for. Whether you are enjoying the boost in the service sector or not, business owners should direct attention to cash flow. At the Credit Protection Association, we conduct credit checks and status reports for our members, strengthening their finances for any dip of blip the economy may endure. Our debt recovery services may provide our members with the necessary extra cash, but without inputting strict safeguards, any financial future is uncertain.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said a second-quarter recovery for the UK’s economy was “on track”, giving the Bank of England a brief window to raise interest rates.

“May’s services report increases our conviction that GDP growth will recover in Q2 following weather-related weakness in Q1,” he said.

Howard Archer, chief economic adviser to the EY Item Club, said the latest batch of PMI surveys pointed to “a reasonable but hardly dynamic pick-up in UK economic growth in May”.

“Furthermore, weakened new business growth maintains concerns over the outlook for the economy,” he added.

Some of the improvement last month was due to companies catching up on work after heavy snow in early 2018. However, the survey revealed that growth in new orders "continued to rise at a relatively subdued rate".

It is good news that the economy is improving, and it could even be good news that the interest rates could increase, thereby inspiring business owners to pursue alternative finance options to bank loans. Other advantages include a greater incentive to save, therefore improving personal and business finances in the process.

Ultimately, an increase in interest rates is not definite, so business owners should ensure their finances are prepared for either event. At the Credit Protection Association, our debt recovery services free up cash flow and give our members the opportunity to change, improve and also sustain the positive behaviour of their business. Whether your business is doing well or not, clearing out all late payers and residual debt can change the business for the better.