Services sector sees lower demand from Asia

4 March 2020

UK service providers saw business activity and incoming new work increase during February but the coronavirus has slowed growth, according to the latest PMI.

The IHS Markit/CIPS UK Services Purchasing Managers' Index found greater willingness to spend after Brexit but also a negative impact on sales caused by the coronavirus outbreak, especially to overseas clients. The index slipped to 53.2, down on 53.9 in January and against the no-change value of 50.

Respondents who had seen an upturn in business activity widely commented on how receding political uncertainty and strong domestic economic conditions had provided a boost.

For the third month running total volumes of new work increased, though the rate of expansion eased off from the start of 2020.

The coronavirus outbreak proved to be the main obstacle to growth cited by service providers, leading to cancellations of bookings and delays to new projects among clients in Asia.

This in turn has led to a fall in total new orders from abroad, although the rate of decline has slowed from that seen in the final quarter of 2019.

Meanwhile another sharp rise in average cost burdens was seen across the service economy, blamed on higher operating expenses and increasing staff salaries.

Increased pressure on margins, from rising input costs, led to the fastest rise in average prices charged by service providers since November 2017.

CIPS group director Duncan Brock said new orders had largely been driven by domestic sales, with some EU clients continuing to avoid doing business with the UK because of lingering concerns about Brexit.

He said the ripple effect of fears surrounding Covid-19 was affecting orders from the Asia region, putting a dampener on new business and subsequently levels of job creation as businesses became cautious about their sales pipeline.

Brock said the consequences for supply chains as a result of coronavirus were only just beginning, as shipments from China were held back and ports were closed.

“Though we are not at the stage of very large scale disruption to businesses, a sudden escalation in coronavirus containment could restrict sourcing performance into the summer months,” he said.

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