Service sector growth adds to economic optimism

Economy on road to recovery as UK’s largest industry sees highest rise in activity for 27 months

Service sector growth adds to economic optimism

It certainly appears to have been a ‘good news week’ as far as the British economy in concerned. Beginning on Monday, when it was revealed that manufacturing had hit its highest growth rate in over two years, we awoke on Tuesday to discover that business confidence was soaring to 2007 heights, albeit not quite reaching the levels seen prior to the recession. Indeed, the only thing that could have put the icing on the proverbial economic cake was a report of equally strong growth in the services sector, which accounts for 75% of the economy. Suffice to say, this was duly delivered yesterday as the latest UK Services Purchasing Managers Index (PMI) from financial information services company Markit and the Chartered Institute of Purchasing and Supply (CIPS) was released. It shows that – accounting for seasonal factors – the headline Business Activity Index has recorded a figure of 56.9 in June, up a whole two points from May’s 54.9 and the highest reading since March 2011.

It is encouraging indeed that the rate and consistency of growth in the services sector is higher than that shown by our manufacturers, given the percentage of the economy the former accounts for. One would find it difficult not to take heart from the fact that growth has now been recorded for six successive months in the services sector, with a significant rise in sales volumes acting as the principal driver of the increase in business activity throughout June. Moreover – and as revealed by the British Chamber of Commerce’s Quarterly Economic Survey earlier this week – business confidence has also seen a welcome spike, with the Services PMI suggesting that expectations about future business activity are at their highest for 14 months among our services sector leaders. It seems that a recent upswing in sales and activity, and the prospect of this continuing in the months ahead, was a principal reason for this optimism, followed closely by new product launched and rewards from past investment. And whilst the latest report stresses that pressure remains when it comes to margins, as a result of stronger competition, that only makes the boost in confidence even more impressive, does it not?

The rate of new business in the sector has also reached a six-year peak and has been accompanied by a sharp rise in employment among companies looking to deal with the sudden backlog of work, the highest rate seen since August 2007 in fact. However, it is suggested that many firms have increased their hiring activity in anticipation of further growth, as opposed to merely recruiting to cater for the higher workloads they are currently facing. It isn’t all rosy though – and it would of course be dangerous to jump the gun just yet – as service providers are still struggling to pass on the costs of higher charges from their suppliers, which have risen to the greatest degree in two years. And this is all despite a moderate rate of inflation in June which was well below that of input costs. Many survey respondents cited competitive pressure as a dominant restriction on their pricing power, with a number admitting they were resorting to discounts to help generate the necessary sales.

“With growth this strong it’s hard to see how any of the members of the Monetary Policy Committee could make a case for further quantitative easing,” said Chris Williamson, chief economist at Markit.

“Policymakers are likely to argue that any action could perhaps be better geared towards trying to ensure the upturn is fully sustainable, such as measures to further encourage bank lending and business investment.”

Hear, hear! 

Adam Pescod
Adam Pescod

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