CIPS News


Strongest rise in UK service sector activity since October 2017

CIPS 4 July 2018

Stronger overall demand placed pressure on operating capacity at service sector firms in June.

IHS Markit / CIPS UK Services PMI®

- Robust and accelerated upturn in business activity

- New work increases at fastest pace for 13 months

- Input cost inflation intensifies in June

UK service providers indicated the fastest expansion of business activity for eight months in June, which continued the recovery in growth seen since March’s snow-related disruption. The latest upturn in service sector output was supported by the strongest increase in new work since May 2017.

However, the rate of job creation remained only modest in June, reflecting difficulties recruiting additional staff and, in some cases, efforts to reduce operating expenses. Margins were again under pressure across the service economy, as highlighted by the steepest rise in average cost burdens since last September.

The seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index posted 55.1 in June, up from 54.0 in May, to remain above the 50.0 no-change mark for the twenty-third consecutive month. Moreover, the latest reading signalled the strongest rate of expansion since October 2017. Survey respondents commented on a general upturn in client demand, particularly for business and financial services. There were also reports that unusually favourable weather conditions had boosted consumer spending.

Mirroring the trend for business activity, latest data revealed a robust and accelerated rise in new work received by service providers. The rate of new business growth was the fastest for just over one year, which survey respondents attributed to successful product launches, new marketing initiatives and improving economic conditions. Nonetheless, there were again reports that Brexitrelated uncertainty had held back business investment, particularly in relation to spending by large corporate clients.

Stronger overall demand placed pressure on operating capacity at service sector firms in June. Reflecting this, latest data pointed to the largest increase in backlogs of work since July 2015. Anecdotal evidence suggested that stronger-thanexpected sales growth and difficulties recruiting additional staff had been factors leading to rising volumes of incomplete work.

Employment numbers increased only modestly in June, with the rate of job creation holding close to the 13-month low seen in April. While survey respondents mainly commented on efforts to boost business capacity, there were also some reports that tight labour market conditions and squeezed margins had led to the non-replacement of voluntary leavers.

June data signalled a sharp and accelerated rise in average cost burdens. Service providers noted greater fuel bills and staff salaries during the latest survey period. Higher operating expenses resulted in the fastest rate of prices charged inflation since March. In some instances, service sector firms commented that high levels of capacity utilisation had provided an additional reason to pass on greater costs to new clients.

Comments

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey: “Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher.

“The survey data indicate that the economy likely grew by 0.4% in the second quarter, up from 0.2% in the opening quarter of 2018. The sharp rise in business costs, linked to surging oil prices and the need to offer higher wages, suggests inflation will also pick up again from its current rate of 2.4%.

“It remains encouraging yet also surprising that current business activity continues to show such resilience amid relatively moribund confidence regarding the year ahead outlook. The survey once again highlights how the business outlook remains clouded by widespread concerns about the impact of Brexit uncertainty in particular.

“Such a divergence between current and expected future activity stokes worries that the upturn is being fueled by short-term spending, based on hopes that uncertainty will lift, and likely masks a lack of longer-term business investment.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said: “Exceeding expectations the sector ended on a positive note at the end of the second quarter, buoyed up by the fastest rise in new orders in over a year and the strongest overall performance since last October.

“However the downside of this achievement came in the form of relentless capacity difficulties as business backlogs rose to an acute degree, not seen for around three years. Not even the minor uplift in hiring could alleviate the problem as salary pressures and the struggle to find skilled hires caused firms to hesitate to increase staff numbers further. Add increased costs for fuel, and the picture emerges of a sector experiencing the sharpest cost inflation since September last year, as well as the confidence to pass on these additional costs to their clients to maintain their margins.

“Optimism about the future remained fairly solid, possibly lifted by the effects of the warm weather. So, the sector is moving in the right direction despite the background impact of Brexit still in evidence and larger corporates holding back from placing big ticket orders.”

For industry comments, please call:

CIPS

Trudy Salandiak Tel: +44 1780 761576

Email: trudy.salandiak@cips.org

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