Ukraine peace hopes push shares towards record

Trading

Britain's strengthening economy and reports of a truce in Ukraine helped London's stock market jump to a 14-year high and put it within striking distance of an all-time record peak.

European stock markets also benefited from a Ukraine-induced increase in share prices that have been depressed for months while the conflict has escalated.

The FTSE 100 moved up 44 points to 6,879 while the German Dax increased by 119 at 9626, shrugging off a fall in retail sales across the eurozone.

Figures on Wednesday from the services sector – which ranges from retailing to insurance, banking to hairdressing and accounts for 77% of the economy – showed activity accelerated to a 10-month high in August as output and new orders maintained a run of expansion stretching back almost two years.

President Obama welcomed the truce, but remained sceptical that the rebels in the east of Ukraine or their Russian supporters would negotiate in good faith and work towards a political solution.

Ukraine has proved a stumbling block in the global recovery with economic sanctions on Russia denting business confidence. A decline in German GDP in the last quarter was also blamed on Moscow, which supplies almost 40% of Germany's energy needs.

The UK economy has so far proved largely immune to the spillover from the conflict, with only its manufacturing sector suffering a slowdown in growth during the summer.

The construction and services sector have remained robust and kept GDP growth surging at a 3% annual rate, the fastest in the G7.

The new data are expected to pose a dilemma for the Bank of England, which meets on Thursday to consider raising rates for the first time in more than five years.

At its last meeting, two members of the nine-strong monetary policy committee (MPC) voted to increase base rates from the current historic low of 0.5% to combat what they saw as a tightening labour market and potential for inflation.

Analysis by the fund manager Legal & General showed that inflation in Britain was likely to increase over the next couple of years in response to a steady rise in employment and average pay rises in excess of inflation.

The Markit/CIPS purchasing managers index (PMI) for the services sector jumped from an already high 59.1 to 60.5, which was the sharpest monthly improvement in activity since October 2013. The business activity index, which indicates expansion with a figure of more than 50, has shown growth for the past 20 months.

Markit, which compiles the index, said the latest figure was underpinned by sharp gains in new business and predictions of higher demand in the second half of the year, much of it from the financial services sector. Employment increased in August and the latest increase in new work was well above the survey average, said Markit.

The only blot on the landscape was a decline in confidence over the outlook for the next 12 months. The prospect of higher interest rates at home and geo-political risks abroad, including the Ukraine crisis, pushed the business confidence index to a 15-month low.

The CBI said in its quarterly economic review that Britain was "on solid ground" but growth would even out in the second half of 2014 and into next year. It kept its forecast of growth this year at 3% and 2.7% in 2015. This strong pace of growth has been bolstered by rising business and consumer confidence and easier access to credit. Reduced uncertainty over the level of business and consumer demand had also played a part , it said.

But it warned that business investment growth, despite being 10.6% higher than a year ago, remained below its pre-crisis peak.

John Cridland, CBI director general, said: "Business investment has been growing better than expected so far this year, but it still has a lot of catching up to do to get back to its pre-crisis level."

He cautioned against any premature euphoria that the Ukraine crisis was over.

"In the wider world, geopolitical risks are growing, with heightened tensions in Ukraine and the Middle East. This brings with it the possibility of upward pressure on commodity prices and on inflation, and also increased global financial market instability," he said.

Chris Williamson, chief economist at Markit, said the robust and sustained recovery in services provided further ammunition for policymakers calling for higher interest rates."The sustained elevated PMI readings suggest we will see another quarter of strong economic growth in the third quarter, similar to the 0.8% expansions seen in the first two quarters of the year."

However, Williamson warned that a recent slowdown in manufacturing growth showed the economy was reliant on the services sector to maintain the recovery.

He said: "Worryingly, the August data show that the economy has become increasingly dependent on the vast service sector as a driver of the continuing recovery. While the services and construction sectors are set to grow by at least 1% each in the third quarter, manufacturing looks to be faring less well."

Powered by Guardian.co.ukThis article was written by Phillip Inman, economics correspondent, for The Guardian on Thursday 4th September 2014 00.05 Europe/London

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