By David Milliken
LONDON (Reuters) - Britain's economy showed its clearest sign to date of bouncing back from the initial shock of June's vote to leave the European Union, but a big slowdown in growth and a further Bank of England rate cut remain on the cards.
A closely-watched monthly gauge of Britain's giant services industry published on Monday reported a record leap in activity in August, echoing similar data released last week for the much smaller manufacturing and construction sectors.
Markit, a data firm, said its survey showed Britain's economy was unlikely to enter a recession in the July-September period. Only a month ago, most economists and Markit's own data suggested a recession was likely.
But despite August's rebound, Markit said the economy was likely to slow to a crawl in the three months to September, growing by just 0.1 percent compared with 0.6 percent in the second quarter of the year.
This would be in line with the Bank of England's projections made last month when it cut interest rates for the first time since 2009, and said most of its rate-setters expected to cut them again before the year's end.
"August's Markit/CIPS services PMI confirmed that the collapse seen in July was a temporary reaction to the shock of the vote to leave the EU. But we doubt this will prevent the MPC from easing monetary policy further in November," Scott Bowman, an economist at Capital Economics, said.
Sterling rallied to a seven-week high against the dollar as the services PMI beat all the forecasts in a Reuters poll to jump to 52.9 - roughly its level before the referendum - after plummeting to a seven-year low of 47.4 in July.
Sterling's post-Brexit slump boosted exports and encouraged more Britons to spend their summer holidays at home.
TROUBLE AHEAD?
Markit economist Chris Williamson said challenges lay ahead as Britain leaves the EU and tries to secure a new trade deal, a process which could drag on until 2019 or longer.
"Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth," he said.
A survey from the EEF manufacturers body on Monday gave the weakest outlook for investment since late 2009, and auto industry data showed that while businesses were buying new cars for their fleets, private buyers were holding off.
The services PMI showed business confidence near a four-year low and the greatest upward pressure on prices in more than two years, as firms felt cost pressure from the fall in sterling.
The overall rebound might reflect the lull in political upheaval after Theresa May quickly succeeded David Cameron as prime minister, but which could heat up again as the ruling Conservative Party thrashes out its differences over how to balance concerns over migration with access to EU markets.
"The political debate over Brexit is beginning to ramp up again with tensions in the cabinet emerging ... and the U.S. and Japanese interventions at the G20 making it clear that the UK still faces significant challenges in managing the Brexit process," BNP Paribas (PA:BNPP) economist Dominic Bryant said.
Japanese Prime Minister Shinzo Abe asked May on Monday to provide more clarity for Japanese companies operating in Britain, following a warning from the country's finance ministry that Japanese banks could leave London.
U.S. Treasury Secretary Jack Lew said a highly integrated relationship between Britain and the EU would be best.
May has said she will not trigger the formal two-year negotiating period for Britain to leave the EU until next year.
(Additional graphics reporting by Andy Bruce; Editing by William Schomberg and Toby Chopra)