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Finance leads continued UK service sector growth

03/07/14

New data has indicated the UK service sector is continuing to grow - led by financial services.

There was no doubt that the UK service sector took some big hits in the recession, as it included so many financial sector firms that either had to be bailed out by the government, were taken over, required private sector cash or simply suffered a major loss of business as the credit crunch took its toll.

As the disaster unfolded, there was a growing realisation by ministers that the UK had relied too much on its service sector - particularly the financial services part - for the country's economic good. As a result, the economic policy narrative has been dominated by talk of rebalancing towards more manufacturing and exports, as well as a geographical shift away from a London-centric model.

For all that industrial output matters - and has contributed significantly to the renewed growth in the economy - the fact remains that services is still by far the largest sector in the UK and its biggest employer. Strong growth in the sector is vital.

The latest data from the Office for National Statistics has indicated this is indeed continuing to happen. The Index of Services for April 2014 has shown year-on-year growth compared with the same month in 2013. All four component parts of the sector contributed to this, but the largest of these - representing 1.7 per cent - was business services and finance.

Good growth in the financial sector, of course, can be a manifestation of many things. One of them is the growth of mortgage borrowing as the property market enjoys a renaissance. Another is the gradual rise in business lending and investment. As some of the business investment is in manufacturing industry, it also means the sector is helping with the task of rebalancing.

Of course, the overall size of the service sector - including finance - may still have a great deal more growing to do. After all, even with first quarter growth of 0.8 per cent the UK economy was still 0.6 per cent smaller than it was in 2008 just before the recession began. Even if the second quarter figures show, as expected, that gross domestic product has passed its previous peak, it will not be by much.

Perhaps it is for this reason that the Bank of England continues to tread carefully over various matters of major significance to the financial sector and the wider economy. That includes its proposed curbs on mortgage lending at high loan-to income ratios, as well as its caution - or some may say uncertainty - over the vexed question of when the base rate may rise. Apparently contradictory messages on the latter issue led to criticism from the House of Commons Treasury Select Committee this week, with Pat McFadden MP accusing it of acting like an "unreliable boyfriend".

However, while the exact path of interest rates may be a matter of uncertainty, the growing strength of the economy and its service sector should help firms deal with the rate hikes when they do come - and carry on creating jobs in finance and elsewhere.

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