Services sector growth slips against 'unusually uncertain' outlook

5 October 2020

Growth of new work in the service sector remained “uneven” in September as hospitality firms faced a Covid-related downturn, according to the latest PMI.

While overall UK business growth pointed towards recovery, hospitality sub-sectors were hit in September by the withdrawal of government schemes such as Eat Out to Help Out and tightening Covid-19 restrictions.

The IHS Markit/CIPS UK Services Purchasing Managers’ Index fell from August’s 58.8 high to 56.1 in September.

The survey found growth mainly focused on areas such as business-to-business services, while hotels, restaurants and catering firms “exposed to social contact” reported a downturn.

The survey found the short-term outlook was “unusually uncertain”, with many remaining “extremely cautious” around cost management and hiring.

Business optimism eased to a four-month low. Firms indicated business would increase through investments in products and services and a boost from future sales and demand after Covid is “fully under control”. 

Operating expenses escalated for a third successive month, partly due to Covid-19 impacts such as PPE purchasing and supplier stock shortages. The rate of inflation was modest, with lower employment costs as numbers in the sector fall.

September also saw the first month of discounting among UK service providers since June due to a combination of competitive pressures, efforts to boost new business, and promotional activities.

Chris Williamson, chief business economist at IHS Markit, said: “Optimism about the year ahead has meanwhile cooled somewhat, hinting that risks for coming months lie skewed to the downside. Companies grew increasingly worried about the impact of a second wave of virus infections and the gradual withdrawal of government support, especially the furlough scheme. 

“Brexit worries are also rising again, causing hesitancy in spending and investment decisions. While the third quarter will inevitably see a strong economic rebound, growth in the fourth quarter looks likely to be far less impressive.”

Duncan Brock, group director at CIPS, said: “Consumer-facing firms remained hampered by Covid-secure measures and cautious customer spending.

“Once again job losses remained the black spot amidst these pockets of recovery. With the seventh consecutive monthly drop in job numbers, redundancies have replaced job hiring in an attempt to shield firms from rising input costs, but these strategies will devastate local communities. 

“There is little expectation that these disruptions will come to an end soon, so many businesses are planning to ‘tick over’ until year end as months of toil and trouble lie ahead.”

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