UK services sector booms as cost pressure mounts

by | Jul 5, 2021

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The recovery in the UK services sector continued at pace in June, a closely-watched survey showed on Monday, but cost pressures mounted as providers battled staff shortages and higher raw material prices.
The IHS Markit/CIPS UK services PMI business activity index was 62.4 in June, revised upwards from the flash estimate of 61.7 and the second-highest reading since October 2013. It was, however, marginally below May’s figure of 62.9.

The index has now posted above 50.0 for four consecutive months, with the average reading for the second quarter – 62.1 -the highest for any quarter in the past 24 years. A reading above 50.0 indicates growth, while a reading below 50.0 indicates contraction.

Job creation was the strongest since June 2014, but despite that, backlogs of work rose at the fastest rate since the survey began in July 1996 due to staff shortages and capacity restraints.

Cost pressures also persisted, notably higher staff wages, raw material prices and transportation charges. Both input costs and prices charged inflation hit record highs as a result, IHS Markit said.

The rise in total operating expenses was the steepest since the survey began 25 years ago.

The seasonally-adjusted UK composite output index, meanwhile, was 62.2 in June, down on May’s 62.9 but still the second-highest reading since the series began in January 1998. The index is a weighted average of the manufacturing output index and services business activity index.

It also showed the strongest growth rate in private sector employment since January 1998.

Tim Moore, economics director at IHS Markit, said: “The service sector recovery remained in full swing during June, as looser pandemic restrictions released pent-up demand for business and consumer services.

“Difficulties in filling staff vacancies were reported by survey respondents in all parts of the service economy during June, with hospitality and leisure experiencing the greatest squeeze.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “This return to robust activity should have service providers relieved at the new opportunities after lockdown, but a modicum of doubt has crept in.

“Optimism dropped to the lowest since January while restricted international travel depressed overseas orders and interrupted supply lines as shortages increase.

“With the sharpest escalation in price inflation in 25 years, it is no wonder businesses are concerned that they are paying substantially more for fuel, food and transport costs that they were a year ago.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The PMI is an outlier among the indicators which we track, the bulk of which suggest that the recovery has lost momentum. Accordingly, we continue to think that month-to-month growth in GDP slow to about 0.5% in June, from around 1.3% in May.

“Meanwhile, the future rise in services output price index, to the highest level in its 23-year history, provides another indication that CPI inflation will rise sharply over the coming months. Nonetheless, labour cost growth should ease in the fourth quarter, when the furlough scheme is wound down, while Covid-related costs will decline when the pandemic finally is in the rear-view mirror.

“In addition, many services firms which have hiked prices to repay Covid-19 crisis loads face being undercut by new businesses unimpeded by legacy debt. As a result, we continue to think that the headline rate of CPI inflation will fall back to the 2% target in the second half of 2022.”

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