Input prices put pressure on service sector margins

3 May 2012

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3 May 2012 | Adam Leach

Activity across the UK services sector increased last month, but the positive news was tempered by a rise in input prices that put pressure on margins.

The Markit/CIPS UK Services Purchasing Managers’ Index (PMI) for April reported a figure of 53.3, continuing a run of 16 consecutive months of growth in the sector. A reading above 50 indicates expansion.

However, this figure confirmed activity grew at a slower rate than in March, where a figure of 55.3 was recorded. In addition to activity, new business wins and employment all increased last month, driven by an improvement in “underlying business sentiment” and marginal growth in backlogs of work. The new business wins and increased confidence supported the highest rise in staffing levels since January’s four-year high.

But while activity rose, margins fell as input price inflation hit a three-month high, principally as a result of fuel price increases. These higher costs were not passed onto customers, with output charges remaining broadly unchanged resulting in tighter margins across the sector.

“Expectations are at their strongest for over two years as a result of new business,” said David Noble, CEO at CIPS. “The development of backlogs offers further encouragement and has led to solid growth in employment, reinforcing this still tentative recovery. However, there is continued evidence of increasing pressure on profit margins. Fuel prices are driving up costs, but continued competition means prices remain relatively flat or reduced, to attract business.”

Chris Williamson, chief economist at Markit, said: “Even though the weaker services growth follows similar slowdowns in manufacturing and construction, the PMI surveys suggest that the economy will have expanded again in April, and that the recent gloomy official data pointing to a downturn in the first quarter will eventually be revised to show modest growth.”

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