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HS Markit

Service sector continues growth to reach three-month high

A survey commissioned by HS Markit has revealed improvement across the service sector, with the latest growth representing the fastest expansion for three months.

The sales volumes increase is attributed to completive pricing strategies, greater business investment and successful new product launches through the month of May.

However, the rise in new business volumes continued to struggle, with respondents admitting Brexit uncertainty a key factor in holding clients back on making decisions.

Parallel to this, tight labour market conditions creating pressure on staff wages and difficulty in recruiting suitably skilled workforce meant that the latest increase in service sector employment numbers was the second-weakest sonic march 2017.

The IHS Markit/CIPS UK Services PMI Business Activity Index rose to 54.0 in May, up from 52.8 in April, with the latest reading the highest since February. Service providers put this down to a number of values, with a catch-up from disruption caused by the weather and snowfall early 2018 alongside a sustained growth of new business.

Service providers signalled only a moderate rise in employment numbers during the latest survey period. Anecdotal evidence indicated that delays in filling vacancies had dampened the rate of job creation recorded in May, with businesses widely commenting on a lack of suitably skilled staff.

A combination of rising salary payments and greater fuel bills resulted in another strong increase in average cost burdens across the service sector. Despite a sharper rise in operating expenses, the latest data pointed to only a modest increase in average prices charged by service providers. Moreover, the rate of charge inflation eased for the second month running to its weakest since June 2017. A number of firms noted that competitive pressures and the need to stimulate demand through promotional discounting had constrained their pricing power.

Meanwhile, business confidence across the service sector moderated for the third time in the past four months. Weaker growth expectations were linked to potential Brexit-related issues for business projects over the coming year, alongside concerns that subdued consumer demand would continue to weigh on UK economic conditions.

Discussing the findings, Chris Williamson, chief business economist at IHS Markit, said: “The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but, like the earlier manufacturing and construction surveys, raises questions about the outlook. So far, the three PMI surveys indicate that GDP looks set to rise by 0.3- 0.4% in the second quarter.

“However, disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence. Measured across all major parts of the economy, new orders growth in the second quarter so far is running at the weakest since the third quarter of 2016.

“Meanwhile, costs are being pushed higher by rising oil prices and wages, although subdued demand means firms are struggling to pass these higher costs onto customers. Average selling prices for goods and services showed the smallest rise for 11 months in May.

“The signs of economic growth rebounding in the second quarter will likely up the odds of the Bank of England hiking interest rates again in coming months, likely August, but with the forward looking indicators suggesting that the economy could relapse, a rate rise is by no means assured.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, commented: “It felt as though the sector was losing its lifeblood this month as Brexit worries continued to claw away at confidence, new orders and business margins. The survey revealed clients and consumers were reluctant to spend with one of the lowest rises in new orders in the last two years, and though overall activity increased, it was at a restrained pace.

“A further attack in the form of a sharp increase in costs for fuel and wages, had businesses stepping up with new products and investment to stay ahead of the game and to prevent even more costs being passed on to squeezed consumers. Businesses were also looking for quality staff to gain the edge on their competitors, but talent shortages and salary hikes dampened the scope for significant hiring this month which was at its second weakest since March 2017.

“The sector will be looking for an urgent dose of clarity and direction from policymakers with Brexit less than a year away, because without a sound pipeline of new work coming through this creeping slowdown could become a state of stagnation, or worse.”