CIPS News


Business activity stabilises during December, helped by a rebound in new work

CIPS 6 January 2020

December data revealed a modest overall expansion of new work received by service sector companies, which ended a three-month period of decline. Anecdotal evidence suggested that domestic political uncertainty in the run up to the general election was the main factor weighing on new orders.

IHS MARKIT / CIPS UK SERVICES PMI®

- New orders rise at fastest pace since July 2019

- Marginal increase in service sector employment

- Business optimism reaches its highest since September 2018

UK service providers indicated that business activity was unchanged in December, following a marginal reduction in the previous month. The stabilisation of service sector output was helped by a return to improving order books, as signalled by the sharpest rise in new work since last July.

Job creation also strengthened in the latest survey period, partly driven by a rebound in business optimism to its highest for 15 months.

The seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index registered 50.0 in December, up from 49.3 during November, to signal a stabilisation of overall service sector activity. Moreover, the latest reading was higher than the earlier 'flash' estimate for December (49.0).

Some survey respondents noted a boost to activity from higher underlying customer demand at the end of 2019. Meanwhile, those reporting a drop in output generally cited a headwind from delayed spending decisions ahead of the general election.

December data revealed a modest overall expansion of new work received by service sector companies, which ended a three-month period of decline. Anecdotal evidence suggested that domestic political uncertainty in the run up to the general election was the main factor weighing on new orders. Moreover, export sales dipped for the fourth month running in December, which was often linked to the lack of clarity in relation to Brexit.

There were signs that service providers have become hopeful that a more stable political backdrop will help to support business conditions over the course of 2020. This was highlighted by a rebound in business optimism to its highest since September 2018, with a number of survey respondents predicting a short-term boost to business activity when the first stage of Brexit is resolved.

Rising workloads and a recovery in business confidence underpinned a marginal increase in staffing levels across the service sector during December. The latest upturn in employment was the fastest for five months, despite reports suggesting that heightened business uncertainty ahead of the general election had encouraged the non-replacement of some voluntary leavers.

Backlogs of work decreased for the fifteenth consecutive month in December, although the rate of decline was only modest. Service providers often cited sufficient spare capacity to complete both new and outstanding orders.

Meanwhile, latest data signalled a strong increase in average cost burdens, with the rate of inflation picking up from the 39-month low recorded in November. Higher input prices were mostly attributed to stronger wage pressures and a corresponding rise in staff salaries.

However, prices charged by service sector firms increased only slightly in December, and the rate of inflation slowed to its weakest since February 2016.

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.

The seasonally adjusted IHS Markit/CIPS UK Composite Output Index registered 49.3 in December, unchanged from that seen in November and slightly below the neutral 50.0 threshold. Moreover, the latest reading was the joint-lowest since July 2016. A stabilisation of service sector activity (index at 50.0) was offset by a sharp and accelerated decline in manufacturing output (index at 45.6).

Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey: "Service companies widely commented on delayed spending decisions and a headwind to sales from domestic political uncertainty in the run-up to the general election. With manufacturing and construction output also subdued in December, the latest PMI surveys collectively signal an overall stagnation of the UK economy at the end of 2019.

"However, the latest UK service sector figures are an improvement on those seen in November and strike a slightly more positive tone than the earlier 'flash' PMI for December. The final IHS Markit/CIPS UK Services data includes survey responses from after the election, unlike the earlier flash estimate.

"It is notable that the forward-looking business expectations index is now the highest since September 2018 and comfortably above its 'flash' reading for December. The modest rebound in new work provides another signal that business conditions should begin to improve in the coming months, helped by a boost to business sentiment from greater Brexit clarity and a more predictable political landscape."

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “A marginally less volatile picture emerged in December as the sector was rescued by a small uplift in new orders for the first time since August, elevating it out of its doldrums, but only just. European customers were less convinced, experiencing ongoing Brexit nerves, and were unwilling to take out their wallets.

"Any improvement in the sector’s fortune is of course welcome, but this small improvement to the no change mark means stagnation is also a possibility. With the lowest prices charged inflation since July 2016, intense competition between firms meant costs were not passed on to consumers and a further rise in fuel costs and salaries could dampen the sector’s hopes of improved margins in the coming months.

"Other clouds of uncertainty must also include the potential for further political instability as negotiators and policymakers take the next steps. But with the fastest level of job creation since the summer and a bounce in business optimism not seen since September 2018, commentators could be forgiven for believing there could potentially be a turning point on the horizon if the UK plays its cards right."

CIPS

Trudy Salandiak

Corporate Communications

T: +44-1780-761576

trudy.salandiak@cips.org

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