Services sector 'in a dark place' as uncertainty hits demand

6 January 2021

Uncertainty caused by Covid and Brexit took its toll on the UK services sector in December as business activity dropped.

Output was hit by a Covid-induced triple threat from business disruptions, trade restrictions, and temporary closures.

At the same time, input inflation reached a 10-month high as suppliers were forced to increase charges following a surge in freight costs and transport shortages.

The IHS Markit/CIPS UK Services Purchasing Managers' Index rose to 49.4 in December, marking an increase from November’s 47.2, but still in negative territory against the neutral 50.0 threshold. 

Firms said the decline was due to “shrinking” demand and reluctance to spend during uncertain climates created by Covid and Brexit. As a result, there has been a significant fall in new work, especially from abroad. 

The negative trend has continued for the third consecutive month, with survey respondents attributing it to “severe restrictions” on international travel and trade. 

There has been limited growth, mainly seen in residential property services, business-to-business services,  e-commerce, and digital consumer services.

Business sentiment was the highest in almost six years as firms appeared hopeful 2021 and the Covid vaccination rollout would bring an economic rebound. According to the survey, over half of respondents (59%) predicted a rise in activity during 2021, while only 13% believed it would decline.

Job redundancies have slowed the most since the downturn began in March 2020, mostly because of the government furlough scheme. 

Tim Moore, economics director at the IHS Markit, said: “Shrinking demand resulted in additional price discounting to stimulate sales at the end of the year. Margins were also hit by a sharp and accelerated rise in operating expenses, which were linked to transport shortages and the pass-through of higher freight costs by suppliers.

“With a third national lockdown underway, service providers will be braced for a sustained period of subdued UK economic conditions and deferred client spending in the first quarter of this year.”

Duncan Brock, group director at CIPS, said: “Service companies face a tricky balancing act between rising costs for shipping and freight services along with stock shortages resulting in higher prices for raw materials which are being passed on to customers.

“The topline PMI figure belies the fact that the services sector is in a dark place with more hardships expected in the first quarter of 2021.”

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