UK service firms defy Brexit, put BoE on spot over rates

By William Schomberg and David Milliken

LONDON (Reuters) - Britain's giant services sector grew strongly in July, according to official data giving the clearest sign to date that the economy did not slump immediately into a major slowdown after the country's vote in June to leave the EU.

The Office for National Statistics also said economic growth was stronger than it previously thought in the run-up to the June 23 referendum as consumers and businesses increased their spending, despite the approach of the vote.

"Together this fresh data tends to support the view that there has been no sign of an immediate shock to the economy, although the full picture will continue to emerge," ONS statistician Darren Morgan said.

The data may dissuade the Bank of England from following through on its plan to cut interest rates again at its next meeting, though the economy still looks set to slow sharply next year when the full impact of the referendum is likely to be felt.

Samuel Tombs, an economist with Pantheon Macroeconomics, said there was now "considerable doubt" about the likelihood of a rate cut in November.

Finance minister Philip Hammond is also weighing up whether he needs to bolster the economy via higher spending or lower taxes when he delivers his first budget plans on Nov. 23.

"The UK started the year in a position of economic strength, and we can see today that this momentum has continued in the services sector - the largest part of our economy," Hammond said after the release of the data.

"We want to build on this strength as we forge a new relationship with the EU and deliver an economy that works for all. The UK is well-positioned to deal with the challenges, and take advantage of the opportunities, that lie ahead."

Howard Archer, an economist at IHS Markit, said he was raising his estimate for growth in the third quarter 0.4 percent from 0.3 percent, and also revising up his view of 2017.

Less comprehensive surveys of purchasing managers had previously suggested that the services sector sagged in July before bouncing back strongly in August.

But the ONS said output in the services sector grew by 0.4 percent compared with June, better than many economists had anticipated, and was up 2.9 percent in year-on-year terms.

PRE-REFERENDUM UPGRADE

Most of the ONS figures published on Friday covered the April-June period, which included only a few days after the June 23 referendum.

The economy grew by 0.7 percent in the second quarter from the January-March period, up from a previous estimate of 0.6 percent growth, and by 2.1 percent compared with the second quarter of 2015 - down from the ONS's last estimate of 2.2 percent.

Consumer demand remained a big driver of growth as spending by households grew by 0.9 percent from the first quarter, even as their disposable income grew more slowly.

The households savings ratio fell to its lowest since 2008, a potential warning sign that consumers might not keep up the pace of their spending in the coming months. Inflation is expected to rise soon because of the fall in the value of sterling in the wake of the referendum.

However, a survey of consumer confidence published earlier on Friday showed levels of optimism among households returned to pre-referendum levels in September.

Britain's trade deficit weighed on growth, posing its biggest drag on GDP since late 2013.

The current account deficit widened in the second quarter -but by less than expected by economists - to 28.7 billion pounds, or 5.9 percent of GDP, the widest since the end of 2015.

British business investment grew by a stronger than previously estimated 1.0 percent from the first quarter, defying earlier expectations that nervousness about the referendum would weigh on companies' spending plans.

(Editing by Mark Heinrich)