CIPS News


Business activity declines for the first time in more than two-and-a-half years

CIPS 3 April 2019

Meanwhile, latest data indicated that business expectations for the year ahead remained subdued.

IHS MARKIT / CIPS UK SERVICES PMI®

- Slight reduction in service sector activity

- New orders fall for the third month running in March

- Prices charged increase at the slowest pace since June 2017

March data signalled a marginal reduction in business activity across the UK service sector, which ended just over twoand-a-half years of sustained expansion. The downturn in service sector output reflected a lack of new work to replace completed projects so far in 2019. Survey respondents noted that corporate clients had opted to delay spending decisions in response to intense political uncertainty. There were also some reports that Brexit concerns and worries about the economic outlook had held back household spending.

At 48.9 in March, down from 51.3 in February, the headline seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index posted below the 50.0 no-change mark for the first time since July 2016. Aside from the brief dip seen after the EU referendum, the latest reading was the jointweakest seen over the past decade (equalling the previous low point recorded in December 2012).

There were widespread reports that domestic political uncertainty had constrained demand in March, with clients hoping for clarity about Brexit outcomes before committing to new projects. New order inflows have deteriorated in each of the past three months, which represents the longest sequence of falling sales volumes since the first half of 2009. Export demand was particularly subdued, as highlighted by another marked drop in new work from abroad.

Reduced capacity pressure meant that service providers were able to bring down their volumes of unfinished business in March. Backlogs have now decreased for six months running, which is the longest period of decline since early-2013.

The latest survey provided positive a sign in terms of staff recruitment, following the job shedding reported during the opening months of this year. Employment numbers were up slightly in March, although the rate of expansion was softer than seen on average in 2018. Service providers continued to note that shortages of labour had restricted their scope to hire additional employees.

Higher staff wages were often cited as a factor pushing up operating expenses across the service economy in March. Reports from survey respondents also pointed to rising transport costs and energy prices. However, the overall rate of input price inflation was unchanged from February's nine month low.

Average prices charged by service providers increased only marginally, with the rate of inflation the slowest since June 2017. A number of firms suggested that subdued demand conditions had led to squeezed margins and pressure to match discounting by competitors.

Meanwhile, latest data indicated that business expectations for the year ahead remained subdued. That said, the degree of optimism edged up to its highest since last October, with some companies citing hopes of greater clarity about the path to Brexit.

All Sector PMI indices are weighted averages of comparable manufacturing, construction and services PMI indices. Weights reflect the relative size of the manufacturing, construction and service sectors according to official GDP data. The UK All Sector Output Index is a weighted average of the UK Manufacturing Output Index, the UK Total Construction Activity Index and the UK Services Business Activity Index.

At 50.0 in March, down from 51.4 in February, the seasonally adjusted All Sector Output Index signalled that private sector business activity stalled during the latest survey period.

A robust upturn in manufacturing production was offset by reduced levels of output at services and construction firms in March.

The average reading for the first quarter of 2019 was only slightly above the 50.0 no-change mark (50.6), which indicated the weakest quarterly performance for the UK private sector since Q4 2012.

March data pointed to a further decline in new business received by UK private sector companies. Meanwhile, employment numbers increased for the first time in three months, but the rate of workforce expansion was only marginal.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “With the headline index posting just below 50 for the first time since July 2016 this month’s results are a seriously worrying development. New orders fell for the third consecutive month and a drop in overall business activity for the first time in two and a half years has left the services sector facing a bleak near-term outlook.

"Worried consumers fearful of rising living costs stayed away from discretionary spending and corporate clients held back on major decisions, preferring to defer big ticket projects until the Brexit deadlock is lifted.

"There was also no respite from strong inflationary pressures as the sector bore the brunt of higher salaries and fuel costs. Service providers were unable to pass these on to customers, hampered by stiff competition and the threat of discounting to retain market share, and resulting in the slowest rise in output charges since June 2017.

"A fight for survival beckons if this market stagnation becomes entrenched, the global economy remains downbeat and the Brexit cloud is not lifted. With business expectations in the sector still close to the weakest seen over the past decade, this inertia will fast become the new normal unless some major change pulls the sector out of the quicksand.

CIPS

Trudy Salandiak

Corporate Communications

T: +44-1780-761576

trudy.salandiak@cips.org

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