Service sector recovery slows again in July, while inflationary pressures hit new record high

CIPS 4 August 2021

Wage pressures, higher fuel prices and greater transport bills were the most commonly cited factors pushing up input costs in July.

IHS Markit / CIPS UK Services PMI®

Including IHS Markit / CIPS UK Composite PMI®

- Weakest rise in business activity since March

- Strongest input cost inflation in 25 years of data collection

- Staff shortages constrain business capacity and recruitment

Data collected 12-28 July 2021

UK service providers recorded an increase in business activity for the fifth month running during July, but the rate of growth was the weakest since March. Staff shortages and supply issues were a severe constraint on business capacity, which led to another strong rise in backlogs of work.

Tight labour market conditions led to greater wage pressures across the service economy and this contributed to the fastest increase in overall input costs since the survey began in July 1996. Prices charged by service sector companies also rose at a survey-record pace.

At 59.6 in July, the headline seasonally adjusted IHS Markit/ CIPS UK Services PMI® Business Activity Index posted above the crucial 50.0 no-change mark and was above the earlier 'flash' reading (57.8), but dropped from 62.4 in June. The index was the lowest since March and therefore signalled the slowest rate of expansion since the end of the winter lockdown. Staff shortages, supply chain issues and the end of the full stamp duty holiday for residential property sales were cited as factors leading to a slowdown since June.

A substantial loss of momentum was seen for new business growth during July, with this index the lowest since February. While many firms commented on strong consumer spending and a sustained recovery in demand for business services, there were also reports that COVID-19 isolation rules had negatively influenced sales volumes.

New export orders returned to growth in July, helped by looser pandemic restrictions in overseas markets. The rate of growth was the strongest since June 2018, but still much weaker than seen for overall new work. Those reporting a drop in new work from abroad overwhelmingly cited tight restrictions on international travel.

Backlogs of work increased for the fifth successive month in July and the rate of accumulation was only slightly slower than June's record high. Many service providers commented on staff shortages due to COVID-19 isolation rules. Anecdotal evidence also highlighted ongoing difficulties rebuilding business capacity due to supply issues and lengthy wait times to fill vacancies.

Job creation continued at a brisk pace in July, reflecting strong demand for staff across the service economy. However, the rate of employment growth slipped to a three-month low, which survey respondents often attributed to unexpected staff departures and delays with finding suitably skilled candidates.

Wage pressures, higher fuel prices and greater transport bills were the most commonly cited factors pushing up input costs in July. The overall rate of inflation was the steepest since the survey began 25 years' ago. A combination of rising input prices and stronger demand meant that service providers increased their average charges at a survey-record pace in July.

Finally, the latest survey indicated that service sector companies remain highly upbeat about their growth prospects for the year ahead. Around 57% predict an expansion, while only 9% anticipate a decline in business activity. However, the degree of confidence has now slipped for four months in a row and the latest reading was the lowest since January. Some firms noted that the peak phase of recovery had passed, and others cited concerns about capacity constraints.

Tim Moore, Economics Director at IHS Markit, which compiles the survey: “July data illustrates that recovery speed across the UK economy has slowed in comparison to the second quarter of 2021. More businesses are experiencing growth constraints from supply shortages of labour and materials, while on the demand side we've already seen the peak phase of pent up consumer spending.

The full easing of pandemic restrictions appears to have helped limit the overall loss of momentum towards the end of July. At 59.6, the PMI reading for services output was much stronger than our earlier 'flash' figure of 57.8 in July, largely due to the final index covering an extra five working days since 'freedom day'.

"Any re-acceleration of growth in August looks unlikely, however, as new orders increased at a much-reduced pace at the start of the third quarter. Moreover, business expectations softened again during July, with UK firms the least optimistic about the growth outlook since January. Survey respondents cited worries about recruiting staff to meet business expansion plans and some suggested that escalating costs would hinder the recovery."

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “With new orders the weakest since February, demand in the services sector appears to be waning along with business optimism as supply and staff constraints impacted on activity last month.

"Unfilled vacancies due to skills shortages and low stocks at suppliers meant further gains were obstructed and backlogs of work increased. Adding to capacity pressures, the relentless rise in input cost inflation to its highest for a quarter of a century meant businesses were paying more for wages, transport and food, and consumers were beginning to bear the brunt with onward price inflation the most elevated since the survey began in 1996.

"We suspect the best of the post-pandemic recovery could be behind us, especially if higher leisure and hospitality costs diminish appetite for consumer spending. Consumer Price Inflation reached 2.4% in June, surpassing the 2% target set by the Bank of England, and it is likely to go higher in the coming months as salary increases add pressure on prices through the summer."

IHS Markit / CIPS UK Composite PMI®

Weakest rise in private sector output since March

The seasonally adjusted UK Composite Output Index dropped from 62.2 in June to 59.2 in July, thereby signalling the slowest rate of private sector expansion for four months.

The composite index is a weighted average of the Manufacturing Output Index and the Services Business Activity Index*.

Service sector activity (index at 59.6) rose at a faster pace than manufacturing production (57.1), but both sectors experienced a further slowdown in recovery momentum during July.

Supply shortages resulted in strong rises in backlogs of work across both the manufacturing and service sectors in July, with the former posting the faster rate of accumulation.

Average cost burdens increased at the sharpest rate since the composite index began in January 1998. Prices charged inflation across the UK private sector also hit a series-record high in July.

Manufacturers reported the stronger overall pace of inflation, but service providers drove the acceleration since June. 

Trudy Salandiak

Corporate Communications


T: +44-1780-761576

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