Markit / CIPS UK Services PMI®
- Business activity expands at slowest pace since September 2016
- Softer rise in new work, but business optimism remains strong
- Input cost inflation reaches an eight-and-a-half year high
UK service sector firms remained in expansion mode during February, but growth momentum eased further from the 17-month peak seen at the end of 2016.
The slowdown mainly reflected a softer pace of new business growth, which some respondents linked to more cautious spending among consumers. Business confidence nonetheless remained strong, with service providers indicating that optimism was little-changed from the post-referendum high recorded at the start of this year.
Higher business costs were the main negative development in February, with average input prices rising at the steepest pace since August 2008. This led to the largest increase in prices charged by service providers for almost eight-and-a-half years.
At 53.3 in February, the headline seasonally adjusted Markit/CIPS UK Services PMI® Business Activity Index was down from 54.5 in January but still well above the 50.0 threshold that separates growth from contraction. The latest reading indicated the slowest expansion of overall business activity since last September. However, the index was broadly in line with its average for 2016 (53.2), to suggest a solid underlying pace of service sector growth so far this year.
Higher levels of business activity were attributed to the resilient economic backdrop and another solid rise in new work. Nonetheless, there were also reports that squeezed consumer finances and increased operating costs had acted as a brake on growth. Reflecting this, latest data revealed the slowest expansion of new business intakes for five months.
A moderate pace of job creation was maintained across the service economy in February, although the latest rise in employment numbers was still subdued in comparison to the trend seen over the past four years. Additional staff hiring was linked to long-term expansion plans, new product development and greater workloads.
The additional hiring helped to alleviate capacity pressures, as highlighted by a marginal decline in backlogs of work at service providers.
February data pointed to a strong degree of positive sentiment regarding the year-ahead, with confidence about further activity levels little-changed from January’s post-referendum peak. Survey respondents cited a sustained improvement in UK economic conditions and hopes that Brexit-related uncertainty would have a limited impact on client demand in the near term. That said, some firms noted concerns that sharply rising business costs and higher inflation had the potential to constrain growth in 2017.
Service sector cost inflation accelerated to its fastest for eight-and-a-half years in February, driven by supplier price increases in response to exchange rate depreciation. Increased transportation costs, rising energy prices and higher salary payments were also widely reported.
Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:
“A further slowdown in UK business activity growth in February adds to evidence that the economy has lost momentum after the impressive expansion seen at the end of last year. The PMI surveys are collectively signalling GDP growth of 0.4% in the first quarter.
“Weaker consumer spending was a key cause of slower service sector growth, suggesting that household budgets are starting to crack under the strain of higher prices and weak wage growth.
“The ongoing steep upturn in costs suggests that consumer price inflation has significantly further to rise, adding to our belief that inflation will breach 3% over the course of the next year.
“However, the slowdown in the pace of economic growth signalled by the February data pushes the PMI surveys back towards territory more indicative of additional policy stimulus from the Bank of England than a tightening. Policymakers are therefore likely to continue to stress the need to look through any further upturn in inflation and focus instead on the need to keep policy accommodative in the face of a likely further slowing in the pace of economic growth in 2017.”
Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said:
“The UK service sector continued to lose momentum in February, which causes concern that the main driver of growth in the UK economy is losing some vitality. Though still in positive territory, business activity expanded at the slowest pace since September 2016, largely reflecting a weaker upturn in new work.
“Exchange rate depreciation, rising energy costs and higher wage bills all had a profound impact on prices charged inflation, which was the highest since September 2008. Cautious consumer spending had a moderating impact on pricing power, but firms were still compelled to increase their charges to customers in anticipation of more cost pressures to come. This will have policymakers wondering whether consumers can continue spending as Brexit negotiations approach, or whether they rein back further in response to squeezed household budgets.
“In spite of all this, the service sector’s optimism remained high, and there was sufficient confidence to maintain staffing levels in preparation for new products, expansion and increased competition.”