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Service sector growth slips to 11-month low

Tuesday, September 05, 2017

IHS Markit / CIPS UK Services PMI®

- Weakest rise in business activity since September 2016

- Input cost pressures pick up in August

- Job creation strengthens to 19-month high

UK service providers recorded solid rises in business activity and incoming new work during August, but rates of growth eased since July and remained notably weaker than seen on average in the first half of 2017.

The latest survey also pointed to stronger cost pressures across the service sector, with the rate of input price inflation the fastest since February. Higher staff costs, fuel bills and prices for imported items contributed to another solid increase in average prices charged by service providers in August.

At 53.2 in August, the headline seasonally adjusted IHS Markit/CIPS Services PMI® Business Activity Index registered above the 50.0 nochange value for the thirteenth consecutive month. However, the index dropped from 53.8 in July and signalled the slowest pace of business activity expansion since September 2016.

Survey respondents noted that subdued client demand and heightened uncertainty about the domestic economic outlook had weighed on business activity growth in August. Reflecting this, new order volumes increased at the secondslowest rate since September 2016. A number of service providers commented that fragile business confidence had led to delayed spending decisions among clients.

Despite a slowdown in new business growth in August, the latest survey data highlighted renewed pressures on operating capacity across the service economy. This was highlighted by the steepest rise in backlogs of work since July 2015. Service providers responded to rising workloads and pressures on operating capacity by recruiting additional staff in August. The rate of job creation accelerated for the third month running to its strongest since the start of 2016.

August data pointed to a sharp increase in average cost burdens at service sector companies. The rate of input price inflation picked up further from May’s recent low and was the fastest for six months. Some firms also suggested that recent exchange rate depreciation against the euro would likely drive up costs in the near-term. Higher operating expenses placed pressure on firms to increase their average prices charged in August. The latest rise in service sector charges was the fastest since April.

Meanwhile, latest data revealed that service providers’ business confidence edged up to a threemonth high, but remained subdued in comparison to those seen prior to the EU referendum last summer. Companies expecting a rise in business activity over the next 12 months generally cited organic growth, resilient client spending and new product launches. However, there were again reports that Brexit-related uncertainty continued to undermine business confidence.

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said: “A slowdown month as the services sector comes off the boil, challenged by a general unwillingness to spend and invest, alongside fragility in confidence amongst consumers as a result of Brexit.

“Service providers negotiated their way through more uncertain times as the weak pound gave suppliers a reason to hike their charges. With tighter market conditions and increased operating expenses, businesses had to raise their own prices to customers, reducing their pool of willing buyers.

“Going against the grain, the rate of new job hires rose to their highest level since the beginning of 2016, in an attempt to relieve capacity issues and to counteract the biggest increase in levels of backlogs since July 2015. Optimism edged up from its recent low point. “In all, a month of two halves where some businesses were willing to launch new products and manage price increases, set against those paralysed by economic hesitancy.”

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey: “A summer slowdown was evident in the economy as the August PMI surveys showed slower rates of expansion in services and construction offsetting an improved performance in the manufacturing sector. The resulting overall expansion was the weakest for six months.

“Although the latest two months’ data put the economy on course for another 0.3% expansion in the third quarter, momentum is being gradually lost.

“Robust manufacturing growth means the economy may be rebalancing towards goods production, aided by the weaker pound, but the slowdowns in services and construction send warning signals about the health of the economy.

“In services, the weaker growth trend was most evident in consumer–facing sectors such as hotels & restaurants and other personal services, which includes businesses such as cinemas, gyms and hairdressers.

“The overall level of optimism also remained subdued, mainly linked to Brexit uncertainty, close to levels that have previously been indicative of the economy stalling or even contracting.

“While a rise in price pressures will add to worries that inflation could pick up to perhaps 3% again in coming months, the overall level of the PMI remains more consistent with policymakers erring towards stimulus rather than hiking interest rates, suggesting the doves will continue to outnumber the hawks.”

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CIPS

Trudy Salandiak Tel: +44 1780 761576

Email: trudy.salandiak@cips.org