CIPS News


UK services growth weakest in over three years in April

CIPS 5 May 2016

UK service sector growth weakened in April, according to the latest PMI® survey data from Markit and CIPS. The rate of expansion slowed for the third time in the past five months, to the weakest since February 2013. Although new business growth picked up slightly, it remained relatively subdued and business optimism was the joint-weakest in over three years.

Markit/CIPS UK Services PMI®  UK Services


Key Points: 

- Business Activity Index hits 38-month low 

- Slowest rise in employment since August 2013 

- Input price inflation at 27-month high

UK service sector growth weakened in April, according to the latest PMI® survey data from Markit and CIPS. The rate of expansion slowed for the third time in the past five months, to the weakest since February 2013. Although new business growth picked up slightly, it remained relatively subdued and business optimism was the joint-weakest in over three years.

Firms commented on prevailing economic uncertainty, partly linked to the forthcoming referendum on EU membership. The latest survey data also signalled the strongest upward pressure on input prices since January 2014, linked to the introduction of the national living wage.

The headline figure for the survey is the seasonally adjusted Markit/CIPS UK Services Business Activity Index, a single-figure measure designed to track changes in total UK services activity compared with one month previously. Readings above 50.0 signal growth of activity compared with the previous month, and below 50.0 contraction.

The Business Activity Index fell from 53.7 to 52.3 in April, the lowest since February 2013 and indicative of only a muted rise in services output. In comparison, the index has averaged 55.2 since its inception in July 1996. That said, the current 40-month sequence of uninterrupted growth is the second-longest registered over the survey history.

A further rise in new business volumes was indicated in April, helping to support overall growth of activity. The rate of expansion strengthened slightly from March, but was nonetheless the second-weakest in over three years. There was evidence from the latest survey that the forthcoming EU membership referendum had added to prevailing economic uncertainty, with some firms mentioning the delayed placing of new contracts by clients.

The overall level of outstanding business held by service sector companies fell for the second time in 2016 so far, reflecting the ongoing relatively weak growth in new business. The rate of decline was only marginal, however.

Service sector employment continued to expand in April, with the rate of job creation remaining above the long-run survey average. That said, the pace of growth was the weakest in over two-and-a-half years, underlining the overall subdued nature of business conditions in the sector.

The 12-month outlook for services activity according to survey respondents remained relatively subdued in April, with sentiment the jointweakest in over three years as firms continued to report an undercurrent of market uncertainty.

The introduction of the national living wage was reported as a key factor driving up input costs in April. The rate of inflation hit a 27-month high, with cost pressures also linked by firms to rising fuel prices and the impact of the weaker pound. That said, input cost inflation remained below the longrun survey average, and firms raised their own prices at a subdued pace.

Chris Williamson, Chief Economist at Markit, which compiles the survey: “The slowdown in the service sector follows similar weakness in manufacturing and construction to make a triple-whammy of disappointing news on the health of the economy at the start of the second quarter.

“The PMI surveys are collectively indicating a nearstalling of economic growth, down from 0.4% in the first quarter to just 0.1% in April.

“Some of the slowdown may be attributable to the early timing of Easter, though April also saw an increase in the number of companies reporting that uncertainty about the EU referendum caused customers to hold back on purchases, exacerbating already-weak demand linked to global growth jitters and ongoing government spending cuts.

“The rate of job creation across the three sectors has meanwhile slowed to the weakest for two-anda-half years, attributed to the combination of weakened demand, the uncertain outlook and the rise in costs associated with the introduction of the living wage.

“The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or through non-standard measures such as QE.”

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply: “The UK’s services sector is stuck between a rock and a hard place. Mounting global economic uncertainty at the top of the supply chain and the reality of the new National Living Wage at the bottom mean that firms are feeling the pinch from both ends. As a result, the sector credited with being the main driver of the UK’s economic fortunes appears to be slowing down.

“The looming EU referendum has had a profound effect on the sector, keeping prices relatively stagnant and delaying new orders. At the other end of the supply chain, the National Living Wage has compounded cost increases, resulting in the overall rate of input price inflation hitting a 27-month high. Together, these factors have squeezed margins while fewer than half of businesses expect to grow over the next twelve months.

“The EU referendum and introduction of the National Living Wage are unique moments in time for the UK services sector, and indeed the wider economy. The question lingers as to how deep an impact they will both have on the sector in the long term.”

For further details, please contact:

Joanna Vickers
Tel: +44 207 260 2234
Email: joanna.vickers@markit.com

For industry comments, please contact:

CIPS
Trudy Salandiak
Tel: +44 1780 761576
Email: trudy.salandiak@cips.org

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