UK services sector sees fastest growth since July 2015

LONDON (REUTERS) - Britain's economy finished 2016 strongly, growing at the fastest rate since mid-2015, even though companies faced some of the fastest-rising costs of the past five years as sterling weakened after Britain voted to leave the European Union, an industry survey showed.

The Markit/CIPS Purchasing Managers' Index (PMI) for the services sector rose to a 17-month high of 56.2 in December, beating all forecasts in a Reuters poll of economists and rising a full point from November's reading.

Britain's economy looked to have expanded 0.5 per cent in the last three months of 2016, said Markit, which compiled the PMI. Similar surveys of manufacturers and construction companies earlier in the week also beat expectations, lifting the all-sector PMI to its highest since July 2015, too.

"A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown," Markit's chief business economist, Chris Williamson, said on Thursday.

Markit's PMIs initially pointed to a big decline in business activity in July, shortly after the vote to leave the European Union in June. That plunge prompted the Bank of England to open a major new stimulus plan in August.

But the PMIs quickly rebounded and official data showed Britain's economy actually increased speed after the referendum.

A separate survey of businesses by the British Chambers of Commerce - the largest of its kind - also suggested earlier on Thursday that the economy kept its momentum in the final months of 2016. But inflation pressures ballooned at the fastest pace since that survey was launched almost 20 years ago.

Nonetheless, most economists forecast that a slowdown will hit Britain in 2017 as companies pass on the higher costs incurred after the pound weakened, squeezing incomes.

In addition, Prime Minister Theresa May aims to start formal Brexit talks before the end of March, which may curtail Britain's future access to EU markets.

Shares in British retailers slid on Wednesday after clothing chain Next reported poor Christmas sales and cut its profit forecast, partly due to rising costs.

Thursday's PMI - which does not include retailers - showed that other businesses in Britain's services sector were passing cost increases on to customers at the fastest rate since 2011. "Anecdotal evidence linked cost pressures to the weak sterling exchange rate, and higher food and fuel prices in particular," Markit said. Costs for wages, plastic packaging and IT also rose, it added.

Many economists expect inflation to rise towards 3 percent this year, from less than 1 percent for 2016 overall, and a Reuters poll suggests the growth rate will halve to 1.1 percent.

But for now businesses are still enjoying strong demand, with companies in the Markit all-sector survey reporting the strongest inflow of new orders since March 2015.