CIPS News


Services PMI data continues to improve from April's survey record low

CIPS 3 July 2020

Cutbacks to staffing numbers were reported again in June, although the rate of job shedding eased to its least marked since the start of the downturn in March.

IHS MARKIT / CIPS UK SERVICES PMI®

- Headline index jumps to 47.1 in June, from 29.0 in May

- New orders fall at much slower pace in June

- Business expectations recover to a four-month high

June data continued to signal a turnaround in business conditions across the UK service sector. The headline seasonally adjusted final IHS Markit/CIPS UK Services PMI® Business Activity Index posted 47.1 in June, up sharply from 29.0 in May and the highest for four months. This compared with the earlier 'flash' figure of 47.0 in June. As a result, the latest reading was well above April's survey-record low (13.4), but still under the neutral 50.0 threshold.

Around 33% of the survey panel reported a drop in business activity during June, while 28% signalled an expansion. The proportion of service providers experiencing a fall in business activity has eased sharply from 54% in May and 79% in April.

Survey respondents again cited highly subdued demand and disruptions related to the COVID-19 pandemic as factors constricting business activity in June. However, there were also reports that an easing of lockdown measures and reopening of the UK economy had a favourable impact on business activity.

In line with the trend for service sector output, latest data signalled the slowest fall in new work since the downturn began in March. Companies reporting a drop in new orders mostly attributed this to cautious business and consumer spending. Where growth was recorded, this was often linked to reopened business operations and pent up demand.

Export sales continue to decrease at a steeper rate than overall new business volumes during June. Reduced intakes of new work from overseas clients largely reflected ongoing international travel restrictions. Some firms also reported longer timescales for securing new projects in external markets, linked to logistical difficulties and heightened global economic uncertainty.

Signs of excess capacity persisted in June, as indicated by another steep reduction in backlogs of work across the service sector. This was mostly linked to a slump in demand and cancellations of orders during the COVID-19 pandemic. However, a sizeable minority of the survey panel noted that constrained operating capacity and a phased return to work had led to an accumulation of unfinished business during June.

Cutbacks to staffing numbers were reported again in June, although the rate of job shedding eased to its least marked since the start of the downturn in March. Some service providers mainly commented on cost reduction measures and a slump in demand. That said, more than half of the survey panel (53%) anticipate a rise in business activity during the year ahead, compared to 21% that foresee a decline. The resulting business expectations index reached a four-month high in June.

Price discounting was reported across the service sector for the fourth month in a row during June, but cost burdens were broadly unchanged. Some firms cited higher average costs due to spending on PPE and reduced operating capacity, although others noted lower fuel bills and reduced payroll costs.

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.

At 47.7 in June, the final IHS Markit/CIPS UK Composite Output Index picked up from 30.0 in May. This was the highest reading for four months, although still below the neutral 50.0 mark. The earlier 'flash' figure in June was 47.6.

Manufacturing production (index at 50.7 in June) once again fared better than service sector output (47.1), with the latter hit by a sustained drag from business closures across vast swathes of the consumer services and leisure activity.

The latest Composite PMI data also showed a continued rebound in business expectations for the year ahead, with confidence reaching its highest since February. Mirroring the trend for current output levels, June data indicated that manufacturers are much more optimistic about the business outlook than service providers.

Tim Moore, Economics Director at IHS Markit, which compiles the survey: “June data highlights that the worst phase of the service sector downturn has passed as more businesses start to reopen and adapt their operations to meet social distancing requirements. The proportion of service providers reporting a drop in business activity has progressively eased after reaching a peak of 79% in April. Around 33% of the survey panel signalled a reduction in business activity during June, which compared with 54% in May.

"Encouragingly, more than one-in-four service providers reported an expansion of new business during June, which was commonly attributed to pent up demand and the phased restart of the UK economy. However, lockdown measures continued to hold back travel and leisure, while companies across all main categories of service activity commented on subdued underlying business and consumer spending in the wake of the COVID-19 pandemic.

"The latest UK Services PMI data highlighted another steep decline in employment numbers, despite a rebound in business expectations for the year ahead. Service providers widely commented on fears of a slow recovery in customer demand and an immediate need to reduce overheads. Moreover, survey respondents often noted the high cost of adapting operations during the COVID-19 pandemic, coupled with constrained business capacity and difficulties passing on rising expenses to clients."

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: "A cessation in some lockdown policies enabled the services sector to emerge tentatively from the shadows last month and reclaim some normality, with the PMI leaping to a four month high.

"Though the sector remained in overall contraction territory, the re-opening of businesses premises unclogged levels of dampened demand and created hope that the worst impact of the pandemic could be over. However, as consumers remain fairly cautious, tightening purse strings, the highest levels of business optimism in four months may be a little premature.

"Pipelines of new work were still severely weakened for the fourth consecutive month, and export orders were still in dire straits. With imposed travel and logistics restrictions disrupting supply chains overseas clients shied away from placing orders as the pandemic’s presence is still felt.

"As the sector regains some momentum, employment levels amongst services personnel remain deeply concerning. Businesses securing their premises to ensure covid safety for staff and customers means operating costs are rising. Some firms are resorting to heavy discounting, others accelerating innovative solutions to change their operating model to stay in business. For others, the decision to shed jobs may be the only solution as the fight for survival continues and the UK economy grits its teeth for the months ahead."

CIPS

Trudy Salandiak

Corporate Communications

T: +44-1780-761576

trudy.salandiak@cips.org

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