CIPS News


Fastest expansion of UK service sector activity for five years in July

CIPS 5 August 2020

New business volumes meanwhile increased for the first time in five months and at the fastest pace since January.

IHS MARKIT / CIPS UK SERVICES PMI®

- Headline index reaches 56.5, up sharply from 47.1 in June

- New work returns to growth in July amid reopening boost

- Business optimism improves for the fourth month in a row

UK service providers reported a strong increase in business activity during July, with the rate of growth the sharpest recorded for five years. New orders also rebounded during the latest survey period, reflecting an improvement in corporate and household spending. Growth was mainly linked to the phased reopening of business operations across the UK economy.

Employment was a weak point in July, with staffing numbers falling at a steep and accelerated pace amid concerns of only a partial recovery in longer-term demand from the levels seen prior to the coronavirus disease 2019 (COVID-19) pandemic.

At 56.5 in July, the headline seasonally adjusted IHS Markit/ CIPS UK Services PMI® Business Activity Index picked up from 47.1 in June and signalled the fastest pace of expansion since July 2015. The index has risen in each month after reaching a survey-record low of 13.4 in April, but the latest reading was the first to exceed the neutral 50.0 threshold since the pandemic began.

Around 38% of the survey panel reported an increase in business activity during July, while only 24% signalled a decline. The proportion of service providers reporting output growth had previously risen from just 7% in April to 13% in May and 28% in June. Higher levels of business activity were overwhelmingly linked to the easing of lockdown measures and subsequent increase in customer demand. However, survey respondents often noted that output had simply risen from an extremely low base and would take a long time to recover to pre-pandemic levels.

New business volumes meanwhile increased for the first time in five months and at the fastest pace since January. Growth was mostly attributed to reopened business operations and a return of clients from furlough. Service providers nonetheless also commented on project cancellations and subdued underlying demand as businesses and households sought to rein in non-essential spending. In contrast to the positive trend for total new work, international travel restrictions at home and abroad contributed to a sustained reduction in new export sales during July.

Backlogs of work dropped again during the latest survey period, although the rate of decline was the slowest since February. A lack of pressure on business capacity and weakerthan-expected demand resulted in lower staffing numbers. Around one-third of the survey panel reported a drop in employment, while only 11% signalled a rise. On a more positive note, business expectations rose further in July, with optimism reaching a five-month high amid hopes that easing lockdown measures would deliver a sustained boost to business activity.

Finally, average cost burdens increased at a robust pace in July, but intense competition for new work meant that service providers' output charges were broadly unchanged since the previous month.

Composite PMI indices are weighted averages of comparable manufacturing and services PMI indices. Weights reflect the relative size of the manufacturing and service sectors according to official GDP data.

The UK Composite Output Index is a weighted average of the UK Manufacturing Output Index and the UK Services Business Activity Index.

At 57.0 in July, up from 47.7 in the previous month, the final IHS Markit/CIPS UK Composite Output Index rose back above the 50.0 no-change mark and signalled the fastest pace of expansion since June 2015.

July data indicated a turnaround in both manufacturing output (index at 59.3) and service sector activity (index at 56.5). In the manufacturing sector, output growth was the strongest since November 2017.

The latest Composite PMI data also revealed a broad-based improvement in business expectations for the year ahead, led by the strongest degree of confidence in the manufacturing sector since March 2018. Service sector optimism was more muted than that seen in manufacturing, but still picked up for the fourth month running in July.

Despite improved trends for both current and expected output levels, latest data signalled another sharp drop in UK private sector employment as businesses sought to adjust capacity following the slump in demand seen during the pandemic. Service sector employment (index at 38.8) fell at a notably faster pace than that recorded among manufacturing companies (index at 43.9). The composite measure was 39.6 in July, an unchanged reading since June and still well below the neutral 50.0 threshold.

Tim Moore, Economics Director at IHS Markit, which compiles the survey: “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. July data revealed the fastest increase in business activity for five years, which adds to signs of recovery across the manufacturing sector this summer.

"Higher levels of service sector output were almost exclusively linked to the reopening of the UK economy after lockdown measures and the subsequent return to work of employees and clients. However, these are still the very early stages of recovery and survey respondents often commented on achieving growth from an exceptionally low base.

"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 the Chartered Institute of Procurement & Supply, said: "The services sector showed a strong return to form at the beginning of the third quarter, with the sharpest rise in overall activity since July 2015 and with new orders making a comeback at the fastest pace since the beginning of the year.

"This further progress on June’s improvements was propelled by the easing of lockdown measures, and returning staff built up operating capacity for any new orders. Business optimism was also at a five-month high in July as the economic situation improved.

"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 in response to worries about the length of the recovery. Although in a small minority, other service providers found new opportunities to hire talent and had the pick of the bunch to fill vacancies from growing numbers of applications.

"Consumer choices also still remained cautious with precovid spending a distant memory in some categories. 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."

CIPS

Trudy Salandiak

Corporate Communications

T: +44-1780-761576

trudy.salandiak@cips.org

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