UK Services PMI - Activity growth down to 17-month low

CIPS 5 November 2014

Both activity and new business rise at slower rates in October

Markit/CIPS UK Services PMI®

- Both activity and new business rise at slower rates in October
- Business sentiment also weakens
- Employment rises at strongest pace for three months

UK service sector growth was sustained during October, but at the slowest rate in 17 months amid reports of some market uncertainty creeping into client decision-making. Although new work also continued to rise sharply, it did so at the slowest rate for five months. Business confidence weakened slightly as a result to a level below its historical average, while average charges were reduced fractionally for the first time in 17 months.
Nonetheless, companies recruited additional staff to the greatest degree in three months as capacity remained under some pressure, which was highlighted by a further increase in work outstanding.

The seasonally adjusted Business Activity Index posted 56.2 in October, down from 58.7 in September. Latest data marked the second successive monthly fall in the headline index, and October’s reading was the lowest recorded for 17 months, although the implied rate of growth remained above the average for over 18 years of data collection.

New business growth was again the principal prop to higher activity. October’s data indicated the twenty-second successive monthly increase in incoming new work, and respondents commented on success in securing new work via higher marketing and improved client engagement.

However, a number of companies commented that new business (and activity) were currently at elevated levels and October had proven to be a slower month in terms of demand growth compared to earlier in the year. There were also several reports of uncertainty creeping into client decision making. The net result was a slowdown in the rate of new business growth to a five-month low.

The weaker rise in new work had some impact on business confidence, with some companies choosing to re-evaluate their forecasts for the coming 12 months. Although business expectations remained in positive territory, with firms planning new product launches and higher investment, overall confidence was the lowest in two months and below the survey’s historical average.

Despite tentative signs of slower growth, companies remained suitably encouraged to take on additional staff not only to deal with current workloads (backlogs of work rose again in October) but also to support future company expansion. Latest data showed the sharpest rise in employment for three months.

Anecdotal evidence implied that recruitment was taking place against the backdrop of a tighter labour market, with salaries and demands for pay increasing. Wage cost pressures were reportedly the principal driver of another round of input price inflation in October.

Finally, strong competition and efforts to entice clients led to a fractional fall in output charges, the first such reduction for 17 months.

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply:
“This month appears to be a slowdown month as the services sector comes off the boil, challenged by capacity constraints, increased backlogs and a slight reduction in new business growth.

“Procurement professionals reports tiptoeing through a time of uncertainty, as suppliers demonstrate stronger bargaining power in tighter market conditions.

“After the scramble to regain former heights seen in the last year comes a period of reflection and re-balance while positive sentiment remains high and levels of staffing are increased. Coupled with the rise in employment levels comes increased input prices with higher wage demands and more competition.

“Finally, with a possible interest rate rise looming, and an associated dampening in confidence, the sector simmers at a more even temperature.”

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