UK Economy Heads Towards Escape Velocity

Following last week's jump in the UK's construction PMI, there is further good economic news.

The UK services sector grew at its fastest pace in more than six years in July. The Markit/CIPS services purchasing managers' index (PMI) rose to 60.2 in July from 56.9 in June, its highest level since December 2006. This is a larger gain than forecast by any of the economists polled by Reuters.

Paul Smith, senior economist at Markit is quoted by Reuters:

"Although an early call on one month's data, the forward-looking elements from the survey point to a further strengthening of GDP in Q3 as the UK heads towards 'escape velocity' and self-sustaining economic expansion."

The PMI survey showed a continued increase in services employment. However, the increase in demand is also causing firms to increase prices; ie people's incomes will remain "under pressure".

UK Construction Jumps

UK construction activity rose in July to its highest level since June 2010.

Reuters reports that the Markit/CIPS construction PMI rose to 57.0 July, up from 51.0 in June. The rise is mainly on the back of an increase in residential construction which has spurred an increase in confidence of purchasing managers.

Whilst the increase in residential construction is hardly surprising, given the increased stimuli to the sector offered by the Chancellor, the size of the increase in PMI is above expectations and as such is very welcome.

Tim Moore, senior economist at Markit said:

"July's survey highlights a new wave of optimism across the UK construction sector, with companies reporting a pace of expansion in excess of anything seen over the past three years."

Like it or not, the UK economy's bedrock is the property sector; by stimulating that sector the Chancellor has in effect stimulated the economy.

The question is, will this stimulation create an inflationary asset bubble?