Service sector sees sharpest growth in five years

5 August 2020

The UK service sector experienced the sharpest rate of growth in five years, according to the latest PMI.

The IHS Markit/CIPS UK Services Purchasing Managers’ Index reached 56.5 in July, up from 47.1 the previous month. The latest figure indicated a pivotal point as it exceeded the neutral 50.0 threshold for the first time since the Covid-19 pandemic began.

Business optimism hit a five-month high and new business volumes also increased for the first time in five months, and at the fastest pace since January.

Respondents indicated a strong increase in business activity, with 38% reporting an increase. New orders rebounded as business operations reopened across the UK as lockdown measures eased.

Service providers reported an increase in output growth from 7% in April, to 13% in May and 28% in June. 

However, survey respondents indicated output had risen from an extremely low base and would take time to recover to pre-pandemic levels.

Despite improvements in business growth, firms still reported being cautious as project cancellations and subdued underlying demand showed efforts to cut down on non-essential spending, according to the survey.

A lack of pressure on business capacity and weaker than expected demand resulted in lower staffing numbers, with around one-third of those surveyed reporting a drop in employment, and only 11% signalled a rise.

Tim Moore, economics director at IHS Market, said: “UK service providers are starting to see light at the end of the tunnel after a record slump in business activity during the second quarter of 2020. 

“While the latest survey data provide a number of positive signs that the UK economy is back in expansion mode, the weakness of the employment figures reported in July is clearly a cause for concern and likely to hold back the longer-term recovery in business and consumer spending.”

Duncan Brock, group director at CIPS, said: “This undoubtedly good news is masking some underlying problems that will still need addressing. Employment fell even more quickly in July as some firms made redundancies.

“As the sector returns to work, increased competition between firms meant that increasing raw materials costs could not be passed on to customers. As the threat of further pandemic lockdown threatens to derail continuing progress, business will have to continue to absorb any additional costs coming their way or face the prospect of having to close their doors permanently.”

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