CIPS News


Slower rise in service sector activity

CIPS 5 July 2017

UK service providers indicated another slowdown in business activity growth during June, which largely reflected the weakest upturn in new work since September 2016. Survey respondents commented on subdued business and consumer confidence, alongside some instances of delayed decision making around the election.

 

Key findings:

  • New business growth eases to nine-month low
  • Job creation picks up to 14-month high
  • Business optimism drops to second-lowest since December 2011

 

IHS Markit / CIPS UK Services PMI®

UK service providers indicated another slowdown in business activity growth during June, which largely reflected the weakest upturn in new work since September 2016. Survey respondents commented on subdued business and consumer confidence, alongside some instances of delayed decision making around the election.

Meanwhile, service sector firms were the least upbeat about their year-ahead growth prospects since July 2016. In contrast, there was a slight pickup in the pace of job creation to its fastest for 14 months in June.

At 53.4, the headline seasonally adjusted IHS Markit/CIPS Services PMI® Business Activity Index posted above the 50.0 no-change mark for the eleventh successive month in June. However, the index was down from 53.8 in May and signalled the slowest expansion of service sector output since February. The average reading in the second quarter as a whole (54.3) was in line with that recorded during the first three months of 2017.

The slowdown in business activity growth in June was linked to a softer rise in incoming new work across the service economy. Moreover, the latest increase in new work was the weakest for nine months. Anecdotal evidence cited Brexit-related risk aversion and heightened economic uncertainty as key factors holding back client spending.

Despite weaker new business growth, service providers reported a rise in unfinished work for the fourth consecutive month in June. Although modest, the pace of backlog accumulation remained among the fastest seen over the past two years. Sustained pressures on operating capacity led to a solid expansion of staffing levels across the service sector in June. The latest increase in employment was the strongest since April 2016. Some firms also commented on difficulties recruiting staff to fill vacancies at their business units.

June data pointed to a sharp and accelerated increase in average cost burdens at service sector companies. The overall rate of input price inflation was nonetheless still much slower than the peak seen in February. Greater operating costs were linked to a combination of rising staff salaries and increased raw material prices (particularly food and imported items). Survey respondents noted that intense competition for new work continued to place pressure on pricing power. Reflecting this, the latest rise in average prices charged by service providers was the slowest since July 2016.

Service sector firms are optimistic overall that business activity will rise over the next 12 months. However, the degree of confidence fell markedly since May. Aside from the post-referendum dip last summer, the level of business optimism was the weakest since December 2011. Survey respondents cited anxiety related to the Brexit negotiations, alongside worries about the general economic outlook and heightened political uncertainty.

Comments

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

“A slowing in services sector growth completes a triple-whammy of disappointing PMI survey readings. Although the three PMI surveys are running at levels that are historically consistent with GDP growing by around 0.4% in the second quarter, it’s clear that the economy heads into the third quarter losing momentum.

“With business optimism having been hit by the intensification of political uncertainty following the general election and commencement of Brexit negotiations, at the same time that households are battling against rising inflation, the indications are that the economy’s resilience is being tested.

“There are pockets of growth, notably in financial services and business services, but the overall picture is one of business spending, investment and exports failing to provide sufficient impetus to fully offset the consumer slowdown.

“Given the deterioration in the forward-looking indicators, such as business optimism and order book growth, the risks are tilted towards the economy slowing in the third quarter.”

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said:

“A creeping doubt appears to be the cause of this month’s below par performance as the UK’s departure from the EU and the unpredictable political climate continues to impact on consumers and businesses alike.

“Strong growth in new orders and overall activity was destabilised by a reduction in business optimism, which fell to one of the lowest levels since 2011.

“This low-key tone was further dampened by growing competition amongst businesses, which placed intense pressure on profit margins. This meant persistent inflationary pressures and the impact of the weak pound were not passed on to consumers as firms absorbed higher costs for food, fuel and wages themselves.

“Yet the drive to hire staff bucked this softening trend as firms sought to alleviate backlogs with the strongest jobs growth for 14 months. The struggle for good-quality, skilled workers continued and some respondents pointed to lower availability of staff as a reason for their difficulties.

“The services slowdown will be no surprise and completes the triple dose of muted results from all three sectors. At this stage it’s hard to tell if this is a sign of things to come or if this lack of enthusiasm is just a temporary response to increasingly tough trading conditions.”

For industry comments, please call:

CIPS

Trudy Salandiak

Tel: +44 1780 761576 / +44 7554 400731

Email: trudy.salandiak@cips.org

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