Services sector shows ‘spring in its step’ as optimism rises

4 May 2023

April saw business activity in the service sector grow at its fastest rate for a year – despite the high cost of living.

The services sector PMI score hit 55.9 in April, up from 52.9 in March, indicating “a strong rise” in output levels across the sector.

The index has been above the neutral 50.0 value for the last three months running, with the latest level confirming growth is at its fastest since April 2022.

This latest figure now means business optimism has increased every month since last November, and data shows this is supported by resilient consumer spending and improving confidence towards the global economic outlook

More than half of those surveyed (52%) said they expect to see an increase in business activity during the year ahead. This compares to just 12% who predict a decline.

Commenting on the data, CIPS chief economist, John Glen, said: "The long months where people stayed in during the pandemic continue to live long in the memory, and consumers are prioritising spending on holidays and experiences despite the cost-of-living crisis. Strong demand for leisure activities has helped the UK services sector begin Q2 with a spring in its step.”

He added: “April saw the strongest upturn in new orders since March 2022, due to a calming of the economic waters after the UK avoided a recession, and consumers booking summer holidays.”

He continued: “The return of international tourists has been further positive news, with US travellers arriving in the UK ready to take advantage of the weak pound against the dollar.”

The PMI data shows total new work for businesses increased at its strongest rate for 13 months in April, supported by improving domestic demand and an increase in export sales. The rate of employment growth was also at its fastest since September 2022.

Glen added: “With the King’s Coronation just around the corner and three bank holidays in May, the sector is optimistic for continued strong demand as spring turns to summer."

However, despite all this positive news, the PMI data also noted elevated energy prices and ongoing pay pressures are continuing to contribute to a steep rise in business costs.

Almost half (48%) of those surveyed said they saw a rise in their input costs, while only 3% said there had been a fall. Higher salary payments were the most cited reason for increased business expenses, followed by elevated energy prices.

More than a third of those surveyed (34%) said they’d seen a rise in their prices charged, which was around three times higher than the pre-pandemic average. All-told input price inflation accelerated for the first time since last November.

S&P Global Market Intelligence economics director, Tim Moore, said: "A strong rate of service sector growth means the UK economy has started the second quarter of 2023 in positive fashion. Overall private sector output expanded at the fastest pace for one year, despite another fall in manufacturing production during April.”

He added: “While the growth outlook has improved considerably for the service economy this spring, a swift rebound in customer demand appears to have reignited inflationary pressures. Both input costs and average prices charged increased at faster rates in April, which service providers overwhelmingly attribute to greater staff wages.”

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