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Business activity growth edges up from August’s recent low

Wednesday, October 04, 2017

IHS Markit / CIPS UK Services PMI®

- Sustained rise in service sector output during September 

- New business growth eases to 13-month low

- Input cost pressures intensify

September data revealed a continued upturn in business activity across the UK service sector, although the rate of expansion edged up only slightly since August and remained weaker than seen on average in the first half of the year. Relatively subdued domestic demand acted as a drag on activity growth, with the latest rise in incoming new work the slowest for 13 months.

At the same time, service providers remained under pressure from sharply rising operating expenses, which contributed to the fastest rate of prices charged inflation since April.

The headline seasonally adjusted IHS Markit/CIPS Services PMI® Business Activity Index posted 53.6 in September, up from an 11-month low of 53.2 in August. Looking at Q3 as a whole, growth has eased slightly since the previous quarter (the index averaged 54.3 in Q2, compared to 53.5 in Q3).

While survey respondents cited a range of supportive economic fundamentals, including healthy labour market conditions and resilient consumer spending, there were also reports that worries about the business outlook had acted as a growth headwind.

Service providers commented on subdued business-to-business sales and delayed decisionmaking on large projects in response to Brexitrelated uncertainty. Reflecting this, latest data indicated that overall new business volumes expanded at the slowest pace since August 2016.

Service sector firms also reported a decline in optimism towards their year ahead growth prospects. The net balance of survey respondents anticipating a rise in business activity over the next 12 months was the lowest since June, meaning that business confidence remained close to its weakest since the end of 2011. While a number of firms commented on resilient confidence in terms of planned product launches and their own sales strategies, this was counterbalanced by anxiety about the wider economic outlook and the prospect of continued political uncertainty ahead.

Despite softer new business growth and fragile business confidence, latest data indicated a sustained rise in service sector employment. The rate of job creation eased only slightly from August’s 19-month high. Moreover, a number of firms commented on increased unfilled vacancies at their business units, reflecting difficulties in recruiting suitably skilled staff. September data indicated that input cost inflation reached a seven-month high and remained among the strongest seen since early-2011. Higher operating expenses were linked to rising food, energy and fuel bills, alongside increased prices for imported items and greater staff salaries. Sharply rising cost burdens prompted another solid increase in average prices charged by service sector firms.

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey: “The services sector saw another month of modest growth, running in the middle ground between the robust expansion seen in manufacturing and the contraction recorded in construction. The three PMI surveys put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth.

“Across all three sectors, inflows of new business in September were the lowest for 13 months, and business optimism about the year ahead slipped lower.

“Higher costs meanwhile led to the largest monthly rise in average prices charged for goods and services since April, meaning consumer price inflation could rise above 3% in coming months. “The surveys therefore portray an economy struggling with the unwelcome combination of sluggish growth and rising prices, presenting a dilemma for policymakers.

“The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow-up on its increasingly hawkish rhetoric and hike interest rates. However, the decision is likely to be a difficult one, as the waning of the all-sector PMI in September pushes the surveys slightly further into territory that would normally be associated with the central bank loosening rather than tightening policy.”

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said: “Strong signals indicate a stagnation trend is developing in the sector. With a subdued rate of expansion in September, UK services maintained a lower than long-term average performance this month.

“Where consumers recovered a little from their spending hesitation last month, it was the turn of businesses to be spooked into inactivity, exerting greater scrutiny over new projects and long-term spending plans. The pressure of Brexit and resulting uncertainty were at the heart of this indecision.

“In the absence of new business, companies were preoccupied with tackling backlogs of work, but maintained levels of staff recruitment which was good news, though skills shortages impacted on hiring and capacity.

“The added weight of operating cost pressures continued with the biggest surge in prices for five months as food and fuel costs were on the rise and salary burdens increased. The time had also come for businesses to pass on these additional costs to their clients after months of squeezed margins.

“Whether there will be any significant bounceback towards the end of the year remains unlikely if the political landscape remains ambiguous and cost pressures continue to bear down on the sector.”

For industry comments, please call:

CIPS

Trudy Salandiak
Tel: +44 1780 761576
Email: trudy.salandiak@cips.org