Slowest growth of UK service sector recorded for nine months

CIPS 3 April 2014

Activity, new business and employment all continue to rise...but at weaker rates

Output charges stagnate as input cost inflation weakens

Growth of the UK service sector remained marked during March, though maintained its recent downward trajectory to hit its lowest level since June 2013. New business volumes followed a similar trend, while there was also a slower increase in employment. Price pressures continued to dissipate, while confidence regarding the outlook remained firm.

The headline index from the survey, the seasonally adjusted Business Activity Index, registered 57.6 in March. Remaining well above the 50.0 no-change mark, the index signalled another period of sharp activity growth. However, falling for a fifth month in a row, the index posted its lowest level since June 2013.

Incoming new business volumes also continued to rise at a strong but nonetheless slower rate during March. Latest data showed that new work increased at the weakest pace for ten months. Nonetheless, around a third of panellists indicated an increase in new work since the previous survey period, amid reports that clients were confident in the strength and sustainability of the recent economic upturn. The launch of new products and services also helped to support growth of new business.

Capacity remained under some pressure in March, as levels of work outstanding increased for the twelfth successive month. Although the slowest of 2014 so far, growth was nonetheless solid with around 16% of the survey panel indicating an increase in backlogs since the previous month. Continued rises in volumes of new business were reportedly the primary driver of increases in work outstanding.
A number of companies responded to the rise in work outstanding by adding to their staffing levels. With panellists also encouraged by healthy pipelines of new business, which underpinned positive growth projections, a net increase in staffing levels was recorded for the fifteenth month in a row. However, in line with slower activity and new business growth, the degree to which staffing levels rose was the slowest in half-a-year.

On the price front, input costs rose to the slowest degree since May 2013.

Although suppliers were reportedly taking advantage of stronger demand to push through higher prices, and wage costs were said to be increasing, some panellists reportedly improved efficiency to keep overall cost inflation in check.

Meanwhile, output charges rose only marginally and to the weakest degree in ten months of inflation. Strong competition reportedly weighed on pricing power, while some companies noted that lower cost inflation had reduced the need to raise charges.

Finally, despite easing to a four-month low, business confidence remained firm, with over half of the survey panel expecting activity to increase over the next 12 months. Positive business plans amid hopes of a sustainable economic recovery underpinned business confidence in March.

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply:
“Strong signals indicate that a stabilising trend is underway in the services sector. Even with a slower rate of expansion, UK Services maintained an elevated level of growth in March. Although the rate of new work rose at its weakest rate in 10 months, business confidence remains high, with firms planning to raise investment in marketing and expecting to win new contracts.

“Capacity has been an issue with backlogs of work continuing to expand. This, alongside a solid pipeline of new business and a positive economic climate, continued to drive strong job creation for a fifteenth consecutive month – all good leading indicators of a more positive period ahead.

“Price pressures indicated further signs of easing in March. With lower cost inflation, companies did not seek to increase and pass costs on.

“As a whole, we may be seeing a slight downward trend at the start of this year, but we are hopeful that this healthy outlook is where we are now heading.”

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