Data collected August 13-29

IHS Markit / CIPS UK Services PMI

UK service providers experienced a stronger increase in business activity and incoming new work during August. Improving business conditions helped to underpin a rebound in employment growth to its fastest for six months.

However, survey respondents widely noted that a lack of suitably skilled candidates to fill vacancies had held back staff hiring and constrained business expansion plans. Meanwhile, business confidence regarding the year-ahead outlook dropped down to its lowest since March, which was attributed to political uncertainty and the unpredictable impact of Brexit on clients’ business operations.

At 54.3 in August, up from 53.5 in July, the seasonally adjusted IHS Markit/CIPS UK Services PMI ^® Business Activity Index reached its second-highest level since February. The headline index has posted above the 50.0 no-change mark in each month since August 2016, and the latest reading was slightly above the average seen over this period (54.0). Service providers linked higher activity to resilient business and consumer demand.

Growth of incoming new work picked up slightly since July, but was still softer than the trend since the current phase of expansion began in August 2016. Anecdotal evidence suggested that Brexit uncertainty continued to hold back business-to-business spending, especially in relation to large scale projects. Some survey respondents also cited subdued demand from clients operating in the UK retail sector.

Backlogs of work increased for the fourth month running in August, which pointed to sustained pressure on operating capacity at service sector companies. A number of firms linked rising volumes of unfinished business to difficulties replacing departing staff.

August data revealed a moderate expansion of payroll numbers across the service economy as a whole. The rate of job creation was the fastest since February, reflecting efforts to boost business capacity and meet increased workloads. There were widespread reports that tight labour market conditions had constrained employment growth during the latest survey period.

Difficulties recruiting suitably skilled staff contributed to higher salary payments in August. Survey respondents also commented on rising fuel costs and energy prices. Despite a sharp and accelerated rise in average cost burdens, intense competitive pressures meant that prices charged inflation was only modest and remained well below the peak seen in November 2017.

Meanwhile, business optimism eased to a five-month low and remained subdued in comparison to the long-run survey average. Brexit uncertainty featured prominently in the comments from survey respondents, especially the near-term impact on clients’ business investment plans.

Comments

Chris Williamson, Chief Business Economist at IHS Markit , which compiles the survey:

“Faster service sector growth comes as much-needed welcome news after disappointing manufacturing and construction PMI surveys in August. The survey data indicate that the economy is on course to expand by 0.4% in the third quarter, a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month.

“Faster service sector order book and employment growth also offset slowdowns of both in the manufacturing and construction sectors, but also highlights the extent to which the economy has become more reliant on services to support growth, and in particular an especially strong financial service sector. Financial services have outperformed all other sectors so far this year.

“Business expectations for the year ahead meanwhile sank markedly lower, down across all three sectors to one of the lowest levels seen since the EU referendum, largely reflecting increased anxiety over Brexit negotiations.

“Given the increasingly unbalanced nature of growth and the darkening business mood, risks to the immediate outlook seem tilted to the downside.”

Duncan Brock , Group Director at the Chartered Institute of Procurement & Supply , said:

“The services sector was a little more upbeat than the other sectors this month maintaining a steady level of activity growth, and the number of new orders ticked higher.

“Despite this, optimism was more subdued and lower than the survey average. With the weakest business optimism since March, uncertainty around the UK’s decision to leave the EU continued to dampen client operations. Struggles around securing talent and the right skills were also a drag on a sector highly-dependent on trained staff even though job creation rose to its highest levels for half a year.

“Despite input prices rising as service providers paid more for fuel and higher salaries, output charges were up only modestly as businesses hesitated to pass on costs. With consumers already challenged by an interest rate hike and higher living costs, competition and promotional discounting by service providers at least spared households from an even sharper erosion of their budgets.

“In summary, though the sector remained in positive territory, the dark clouds of political indecision are still having an effect and preventing more business activity. Service providers are likely to continue along this vein for the rest of the year until those clouds have cleared.”

– Ends –

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IHS Markit
Joanna Vickers
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CIPS
Trudy Salandiak
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