Services restricted by VAT and job insecurity

3 February 2011
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3 February 2011 | Angeline Albert

Growth in the UK services sector showed only a modest rise in January and job cuts by employers continued.

A three-month average of data shown in the Markit/CIPS UK Services Purchasing Managers' Index, suggests that the rate of growth of activity and new business has slowed substantially since last spring, with only a very marginal rise evident in January.

The Markit/CIPS Business Activity Index shows the sector recovered sharply in January from December’s snow-related disruption, with the index reporting 54.5 last month, up from 49.7 the previous month.

The strongest rebounds in activity were in hotels, catering, and restaurants, personal services, and transport, storage and communications.

The rate of job cuts by service providers showed only a marginal easing from December.

Prices charged for services rose at the fastest rate since September 2008 as firms sought to pass rising costs and higher VAT on to customers, particularly in the hotels, catering, and restaurants sector, reflecting high food prices. Input cost inflation showed the largest jump since the survey began in mid-1996. Transport, Storage & Communications showed the largest increase, reflecting the rise in fuel prices.

Chris Williamson, chief economist at survey compilers Markit said:“The underlying trend remains one of only very modest growth, and well down on the strong rate seen in the first half of last year.

“Demand for consumer services remains particularly under pressure from widespread job insecurity and squeezed incomes, as real wages fall and prices continue to rise. 

“Looking ahead, service providers appear nervous about the future, cutting payroll numbers again in January, despite reporting an improvement in business confidence about the year ahead.”

CIPS CEO David Noble, said:“It is encouraging to see that confidence for the year has improved with over half of the survey panel expecting a moderate increase in activity. Unfortunately this isn’t filtering through to staffing levels, which continue to fall, and we expect that many companies are taking a cautious approach given the recent VAT rise and price pressures.”

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