UK service sector continues to expand sharply in July

CIPS 5 August 2014

Activity rises at stronger pace

Markit/CIPS UK Services PMI® showed:

- Activity rises at stronger pace
- New business again increases substantially as demand for services remains strong
- Payroll numbers continue to rise markedly

Growth of the UK service sector strengthened in July as a positive business environment boosted demand and drove new work higher. With workloads rising and capacity under further pressure, services employment continued to increase at a historically marked rate. Service providers retained positive expectations for growth, albeit to a lesser extent than seen during recent months.

The headline Business Activity Index remained well above the 50.0 no-change mark during July, thereby extending the current run of growth to over a year-and-a-half. Moreover, reaching a level of 59.1, from June’s 57.7, the index posted at an eight-month high. Over 30% of the survey panel signalled an increase in activity at their units since June.

The launch of new services, increased marketing and greater opportunities to tender for business were all noted as factors underpinning growth of activity. Moreover, another considerable increase in new work also drove activity up over the month, with the latest data showing the rate of new business growth in July was little changed on the 2014 high posted in June.

Anecdotal evidence indicated that client confidence was up, and there was a willingness to commit to new contracts. Demand from both at home and abroad reportedly strengthened, while there was some indication that new business placed from public sector organisations had increased.

A feature of the survey data during recent months has been increased hiring activity amongst UK service providers. This trend was extended into the second half of the year, with growth of payroll numbers remaining elevated, despite easing on June’s survey record.

Staff were recruited to help support efforts to keep on top of current workloads and in anticipation of further growth in the coming months.

Indicating capacity pressures, backlogs of work rose at a marked and accelerated pace during July, with the degree of growth the strongest since January. Business outstanding has now increased for sixteen months in a row.

Meanwhile, confidence in the outlook was highlighted by data on business expectations, which showed just under 48% of the survey panel forecasting a rise in activity from present levels in 12 months’ time. That said, the degree of positive sentiment was the lowest for eight months.

Finally, on the prices front, input cost inflation remained marked during July. There were reports from companies that a key driver of higher operating costs was an increase in wages. Utility bills were also reported to have risen.

In contrast, average output prices were little changed in July as competitive pressures continued to thwart pricing power.

David Noble, Group Chief Executive Officer at the Chartered Institute of Purchasing & Supply:



"Growth in the UK’s dominant service sector leapt to an eight-month high in July thanks to substantial increases in new business at home and abroad, which has in turn led to a continued rise in job numbers and profitability. The only dampener is a softening in the overwhelming confidence we have become used to, perhaps a sign of realism sneaking in, as firms keep a close eye on costs and refuse to get carried away.

With backlogs rising, service providers have taken up the capacity challenge, investing in new roles and even starting to increase wages this month. As the labour market tightens this trend is set to continue, putting pressure on the Bank of England to head off inflation when it meets to discuss interest rates on Thursday."

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