Weak sterling helps the services sector

5 August 2019

Despite Brexit stagnation, services sector growth in the UK is at its strongest since October 2018, according to the latest PMI.  

The IHS Markit/CIPS UK Services Purchasing Managers’ Index was up to 51.4 in July against a reading of 50.2 in June and the neutral reading of 50. 

A solid rebound in new work from abroad and a weak sterling exchange rate drove higher levels of business activity in services in July.

Rates of new business growth were at their strongest since autumn 2018 despite clients holding back on decision making due to domestic political uncertainty.  

The survey indicated the sector had experienced the fastest increase in new work from abroad since June 2018. This had been aided by a weak sterling exchange rate against the euro and the US dollar. 

Input price inflation was unchanged from June with firms reporting a rise in business expenses, citing the weak pound, higher staff wages and greater fuel prices.  

Duncan Brock, group director at CIPS, said: “While services activity grew in July, this marginal improvement on last month is a smokescreen. Fundamental weaknesses remain in a sector pinned down by Brexit uncertainty and increasingly stagnant global economic growth.  

“New order growth rose modestly. However, the weakening pound was a boon to overseas customers, especially in the EU and US, as export orders rose to their highest levels since June 2018. 

“The downside to domestic currency weakness was that margins were placed under intense pressure. Firms were caught between an intensely competitive marketplace, and rising fuel and salary costs. This anxiety prevented firms from passing on costs, and translated into the lowest levels of business optimism since March this year.” 

Chris Williamson, chief business economist at IHS Markit, was also cautious in his analysis. “An improved rate of growth in the service sector to the highest since October is welcome news after other PMI surveys showed the sharpest drop in manufacturing output for seven years and a construction sector that is mired in its deepest downturn for a decade,” he said.

“However, the overall picture is one of an economy that is only just managing to skirt recession, with July’s performance among the worst since the height of the global financial crisis in 2009.”

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