The UK services sector grew sharply in June but a slowdown in new orders has resulted in spare capacity at firms, according to a survey of buyers.
The Markit/CIPS UK Services Purchasing Managers’ Index rose to 58.5 in June, compared to May’s five-month low of 56.5 and against a no-change reading of 50.
New order growth slowed to the weakest so far this year and the level of work outstanding fell for the first time since March 2013. Anecdotal evidence linked the decline to uncertainty in core sales markets.
The fall in backlogs had little impact on business sentiment, however, with firms remaining highly optimistic about the 12-month outlook, citing new contract wins, new product launches and post-election improvements as key contributing factors.
Input costs rose solidly, with the rate of inflation little changed from May’s eight-month high, with firms reporting higher wages and increased fuel costs. Tariffs meanwhile were raised only modestly, with respondents citing competitive pressures.
David Noble, group CEO, CIPS, said: “Optimism was in plentiful supply as the pre-election hiatus became a distant memory. Though the pace of new contract wins was marginally slower, this gave the sector the opportunity and capacity to reduce backlogs – the first such drop since March 2013.
“There was also sufficient confidence to develop new products and opportunities, though a slowdown in key markets in the eurozone contributed to some hesitancy in job creation, which, though still strong, was at its slowest pace for six months.”
Chris Williamson, chief economist at Markit, said: “Growth is looking increasingly unbalanced. The recent weakness of the manufacturing PMI means industrial production looks likely to have declined in the second quarter, leaving the economy once again dependent on the service sector to sustain any growth.
“June’s rebound is therefore welcome news, but policymakers will want to see further improvements in the data, including signs of a sustainable upturn in pay growth, before feeling comfortable that the UK economy is ready for higher interest rates.”