Strong growth of service sector sustained

CIPS 4 March 2015

New business increased at sharpest pace for three months

Markit/CIPS UK Services PMI®

Strong growth of service sector sustained

Key Points:

-New business increased at sharpest pace for three months

-Employment rises at second-fastest rate in survey history

-Input and output prices both increase at sharper rates

The UK service sector continued to expand at a marked pace during February, supported by another sharp rise in volumes of incoming new business. Faced with higher backlogs and mild capacity pressures, companies recruited additional staff, with the rate of expansion the second fastest in the survey history.

On the price front, average input cost inflation strengthened from January’s recent low amid reports of suppliers being willing to increase their prices and higher wages being paid. In response, output charges were increased at a modest pace.

The headline seasonally adjusted Business Activity Index recorded 56.7 in February, compared to January’s 57.2. Growth has now been registered for 26 months in a row, and the latest reading remained comfortably above the survey average (data have been collected continuously since July 1996).

Companies overwhelmingly commented that the latest increase in activity was the result of a rise in new business amid evidence of a pick-up in general market conditions. Advertising and promotional activities were also reported, helping to support the fastest increase in new business recorded by the survey for three months. A number of companies commented that sales were, at times, large in nature, and that there was growth from both domestic and international markets.

UK service providers responded to the sharp rise in new business by adding to their payroll numbers at the second sharpest rate in the survey history, with the latest pace of growth surpassed only by that seen in June 2014. Higher employment also reflected a response to capacity pressures, with backlogs of work increasing modestly and extending the current run of growth to 23 months.

Companies also signalled positive projections for future company growth, and recruited extra staff to help facilitate their plans. Business expectations improved marginally in February to a three-month high, with nearly 50% of the survey panel forecasting a rise in activity from present levels in 12 months’ time. There were reports that business pipelines remained positive, and that the economic climate was conducive for growth.

An increased willingness of suppliers to raise their charges combined with evidence of higher wages being paid led to an accelerated rate of input price inflation during February. That was despite ongoing reports of lower fuel bills restricting the degree to which operating costs were increasing.
Service providers also increased their own average output charges in February. Prices have now increased for three months in a row, although the degree of inflation remained modest as competitive pressures placed some restriction on pricing power.

Commenting on the report David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply:
“The services sector has a spring in its step as it continues on a firm footing in February.

“Sharper growth in new business has been driven by an upward swing of activity in both the domestic and international markets, with a mix of new business and higher levels of interest from existing customers showing an overall improvement.

“At a modest level, the sector has become a victim of its own success as the resultant rise in incoming new business has increased pressure on capacity capability: outstanding work has been rising now for the last couple of years. The protracted length of backlog accumulation indicates that the recovery may now be sustainable following the rapid growth of last year.

“Staffing levels continue to rise, and at close to the fastest rate since the survey began, to clear current workloads but also with an eye on future expansion as the scrabble begins for the most talented in the workforce. Wages costs rose, as did output prices as the sector shows confidence in current market conditions.

“The future view continues to be expectant of further gains as businesses report investment in growth, restructuring and capacity to support ongoing rises in activity in the coming months, with half of all respondents showing optimism for business conditions in the year ahead.”

The March Report on Services will be published on Tuesday 7th April 2015 at 09:30

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