Markit/CIPS UK services PMI® show further strong rises in activity and new work encouraging staff recruitment. Confidence also remains high as companies signal expansion plans. Operating costs are up amid reports of higher wages.
Business activity in the UK service sector continued to increase markedly during May, supported by another firm increase in volumes of incoming new work. Capacity was subsequently tested and encouraged service providers to take on staff at the joint sharpest rate since May 1997. Wages were also reported by a number of service providers to have increased, which led to the sharpest rise in operating costs for four months.
Despite the uptick in cost inflation, confidence with regards to future activity was retained, with over 50% of the survey panel forecasting growth over the next 12 months.
After accounting for seasonal factors, the headline Business Activity Index was little changed in May, recording 58.6 compared to April’s 58.7. The index remains historically high and consistent with sharply rising levels of activity in the service sector.
Growth was again underpinned by an increase in volumes of incoming new business amid reports of high levels of market activity. Although edging down slightly to a 12-month low, the degree to which new work rose was again strong as client confidence remained firm. There were reports from panellists that they had raised their marketing activity and launched new services over the month. Providing a further boost to service sector activity was an increase in capacity via the recruitment of additional staff. May’s survey showed the strongest increase in employment for seven months and the joint sharpest rise for 17 years as staff were hired to help deal with higher sales and work outstanding. Backlogs of work rose for a fourteenth successive month in May and at a solid pace.
Business expansion plans were also at the heart of service providers’ decisions to take on extra staff during May. Confidence with regard to future activity remained high as companies retained expectations for continued market growth. Buoyed by an increased willingness to commit to new contracts, service providers are expecting to take advantage of the improved business climate to bolster market share and expand their businesses.
With the labour market tightening, and increased staff numbers being taken on, several UK service providers noted an increase in their average wage costs during May. This served to support a marked increase in average input costs, with the rate of cost inflation accelerating to a four-month high. Utility prices were also noted to have increased, while suppliers were reportedly taking advantage of strengthened demand to raise tariffs.
Firmer market conditions also encouraged several service providers to increase their own charges, although competitive pressures continued to keep a lid on output price inflation in May.
David Noble, Group Chief Executive Officer at the Chartered Institute of Purchasing & Supply:
“Firms in the services sector are creating jobs at a level seen only once since 1997 and offering bigger salaries to boot; a sign of ever-increasing confidence in the sector, which is enabling firms to support expansion and take advantage of improved economic conditions.
“This bullishness is built on a foundation of solid rises in business activity and new work. The increased capacity will also enable firms to work on their existing backlogs, which have risen for the fourteenth consecutive month.
“Whilst increased salaries are driving up operating costs, alongside suppliers looking to increase their margins, there is willingness to invest. This is being driven by strong domestic and overseas markets, suggesting we can be confident this positive trend will continue.”