July data highlighted a disappointing start to the third quarter for the UK service sector, with business activity and incoming new work rising at softer rates than in June. There were also signs that difficulties filling staff vacancies persisted in the service economy, which contributed to the weakest rise in payroll numbers since August 2016.
Higher staff wages and rising fuel bills resulted in another strong increase in average cost burdens in July. However, the rate of input price inflation eased since June, which contributed to a softer increase in average prices charged by service sector companies.
At 53.5 in July, down from 55.1 in June, the seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index signalled the slowest expansion of service sector output since April. Nonetheless, the latest reading was comfortably above the 50.0 no-change mark and pointed to a solid upturn in business activity.
Some survey respondents noted that increased client demand and the unusually dry summer had a positive impact on their sales (especially firms operating in tourism-related industries). However, there were also reports that the hot weather and football World Cup had disrupted business operations and weighed on customer footfall.
The latest survey marked two years of sustained new business growth across the service sector economy. However, the rate of expansion eased since June and was softer than seen on average over this period. A number of survey respondents noted that delayed decision-making and greater risk aversion among clients in response to Brexit uncertainty had held back new business growth in July.
Backlogs of work increased only marginally in July, which mirrored the trend seen on average in 2018 so far. Anecdotal evidence suggested that efforts to improve productivity had helped to limit pressures on operating capacity. Where a rise in unfinished work was reported, this was generally linked to a lack of suitably skilled staff to replace leavers.
Employment growth eased to its weakest for almost two years in July. There were mixed reports about the reason for slower job creation; most firms cited tight labour market conditions, but some service providers commented on long-term plans to automate business processes and maintain service levels with lower headcounts.
On the inflation front, latest data indicated that input cost pressures eased from the nine-month high seen in June, but remained strong in a historical context. Average prices charged by service providers increased at a solid pace, although the latest rise was weaker than the trend seen so far in 2018. Some firms noted that intense competition for new work had restricted their ability to pass on higher costs to clients.
Tim Moore, Associate Director at IHS Markit, which compiles the survey:
“The service sector moved back into the slow lane in July as business activity growth lost momentum for the first time since the start of spring. While it’s difficult to quantify the precise impact of the recent heat wave on overall business performance, some survey respondents reported that a combination of hot weather and the World Cup had weighed on consumer footfall. These short-term disruptions and a general slowdown in new business growth appear to have offset the boost to tourism-related activity from the extended dry period in July.
“Looking at demand fundamentals, service providers commented that Brexit uncertainty had held back new project wins, reflecting risk aversion and a wait-and-see approach to investment spending among international clients.
“Tight labour market conditions and rising wage pressures are also a key challenge for service sector companies, which contributed to the slowest pace of job creation since August 2016. Survey respondents are increasingly citing worries about the availability of suitably skilled candidates to fill vacancies, although this is also helping drive efforts to boost productivity across the service sector.
“Meanwhile, input cost inflation eased back from June’s nine-month high, which helped to moderate the rate at which service sector firms increased their own charges. The combination of slower output growth and softer price pressures during July will reinforce expectations that any further Bank of England rate rises will be both gradual and limited.”
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said:
“The UK services sector experienced a few bumps in the road in July as consumer and client confidence remained persistently half-hearted, and pessimism around the performance of the UK economy along with Brexit concerns lingered.
“Levels of new orders and jobs growth wereaffected along with business optimism which remained below the long-term average even with July’s three-month improvement.
“Several factors came into play to impact this level of job creation which was the weakest since August 2016. Respondents highlighted the lack of skills availability and higher salary demands contributing to higher operating costs. Growth opportunities were also obstructed with higher fuel prices, but strong competition mostly prevented a parallel rise in prices charged to consumers.
“The sector appears to be bumping along a seesaw path with ups and downs, but with the most disappointing performance since April no one can hide the underlying dangers that still remain in the biggest contributor to the UK economy.”
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