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UK services sector rebounds sharply as Omicron fades

The UK services sector rebounded in February, a closely-watched industry survey showed on Thursday, as the Omicron variant faded and output jumped.
The headline seasonally-adjusted IHS Markit CIPS UK Services PMI Business Activity Index rose to 60.5 from 54.1 in January. The reading was an eight-month high, although it was also marginally below both the flash estimate and consensus estimate of 60.8.

IHS Markit said both business activity and new orders had accelerated “sharply” in February, which had in turn supported stronger job creation. The rise in employment was the fastest since October.

The UK Composite Output Index, a weighted average of the manufacturing output and services business activity indices, also rose sharply, reaching 59.9 against 54.2 in January. It too was below the flash estimate, of 60.2.

However, inflationary pressures also continued to mount. Respondents pointed to higher salaries, fuel prices and utilities, alongside rising food and materials costs. As a result, the rate of inflation was the second-fastest in more than 25 years of data collection.

Andrew Harker, economics director at IHS Markit, said: “The ebbing of the Omicron wave contributed to a rebound in growth in the UK service sector, with rates of expansion in activity and new business up sharply.

“With manufacturing also seeing growth quicken, the UK economy looks to have been expanding sharply mid-way through the first quarter.

“Inflationary pressures remained acute, however, with selling prices rising at a fresh record pace for the second month running.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “With these improved economic conditions, the rate of new business orders was one of the quickest in the survey’s history and a surprise leap in both domestic and overseas orders set the seal for the trend to continue.

“However, with the evolving geopolitical situation, companies may struggle to keep on top of this momentum. If sourcing becomes disrupted and prices rise again, businesses many be back to square one and unable to pass on their higher costs to consumers, who faced the strongest rise in prices in a generation this month.”

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “The small downward-0revision [from the flash estimate] likely reflected the stormy weather, through the month, rather than underlying weakness. In addition, the survey’s forward-looking indicators suggest that the sector will continue to grow at a solid pace over the coming months.”

However, Dickens cautioned that recent surge in energy and agricultural commodity prices, prompted by Russia’s invasion of Ukraine, would hit the amount households have to spend on domestically-produced goods and services this year.

“So, after brisk quarter-on-quarter growth in GDP of around 0.6% in the first quarter, we expect the economy to stagnate in the second quarter and to grow only slowly in the second half,” she noted.

The survey was sent to a panel of around 650 service sector companies, which collected data between 10 and 24 February.

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