Improvement in finance industry leads services sector rebound

Output in the UK's services sector bounced back in March, recording its strongest growth so far this year despite continuing cost pressures.

Healthiest growth in five months

Analysts had been expecting the monthly Markit/CIPS purchasing managers' index (PMI) for the sector to be 53.4 for March. In fact, it jumped to 55 on an index where any reading above 50 signifies growth.Despite the slump in sterling, resulting in rises in charges and input prices, the sector – which accounts for more than three-quarters of the UK economy – recorded its healthiest growth in five months, largely on the back of a marked improvement by financial services.Markit said, “Within the service sector, the worst performance so far this year has been seen in consumer-oriented sectors, notably hotels and restaurants, as well as personal consumer services (which include businesses such as sports centres, gyms and hairdressers). The greatest resilience has been seen in financial services.”

Actual growth lower than this time last year

Chris Williamson, IHS Markit chief business economist, said that despite the strong overall performance, it had not changed “the picture of an economy that slowed in the first quarter”.He added, “The relative weakness of the PMI survey data compared to that seen at the turn of the year suggests the economy will have grown by 0.4 per cent in the first quarter, markedly lower than the 0.7 per cent expansion seen in the fourth quarter of last year.“The March uptick in the PMI surveys merely brings the data in line with a neutral policy stance at the Bank of England.“As such, the data add to the sense that, with economic and political uncertainty likely to intensify as the Brexit process gets under way, policymakers are likely to continue to stress the need to look through any further upturn in inflation and focus instead on the need to keep policy on hold to support economic growth.”Markit said some firms were struggling to get their work done. “A combination of rising workloads and softer employment growth contributed to a renewed accumulation of backlogs across the service economy. Some firms noted that squeezed margins and rising wage bills had led to the non-replacement of voluntary leavers.”

'Little to be enamoured with'

Jeremy Cook, chief economist at the international payments company, World First, commented, “While the headline index number may have rebounded from a five-month low in February, there is little to be enamoured with in this reading of the UK’s most important sector; consumers are under pressure, services sector companies that cater to them are weaker and margins are likely being pressured further.“Average prices are at the highest level in 8.5 years and whilst some consumer resilience is allowing some of this to be passed on in higher prices on the shelves we have to think that that consumer resilience will give way before the business need to keep prices raised does.“In the short term, this means a turning of the screw for the man in the street and a poor outlook for High Street profits. This sector makes up the majority of the UK economy and the prognosis is poor.”

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Howard Archer from IHS Global Insight, also expressed fears of a slowdown this year because of rising inflation. “Services' activity has been particularly led by the consumer-facing sectors,” he said.“Looking ahead, we suspect that consumer services activity will be increasingly pressurised by consumers’ purchasing power weakening over the coming months as inflation rises appreciably and earnings growth is muted. This is likely to cause some consumers to cut back on their discretionary spending, including on services.”For related news and features, visit our Enterprise section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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