Knowledge & Insight

UK services sector looking strong

Tue 27 June 2017

The services sector has grown to become the main powerhouse of the UK economy, contributing almost 80% of annual GDP. As one of the few sectors to have regained and surpassed its pre-crash peak, UK services are of particular interest to market commentators and analysts, with recent figures published by the Chartered Institute of Procurement & Supply (CIPS) showing that the sector continues to enjoy a powerful resurgence.

The facts & figures

The Markit/CIPS UK Services PMI ®  (Purchasing Managers Index) is based upon the responses of firms operating in diverse service sub-sectors: transport & communication, financial intermediation, business services, personal services, computing & IT, hotels & restaurants – so it provides a well-rounded insight into the health of the UK’s largest industry sector.

The index takes account of numerous business indicators, including the volume of business activity, new work and employment levels, the level of prices charged, and expectations for the future. An index of greater than 50 signifies a positive change in the aggregated metric, while an index of less than 50 indicates a deterioration or decrease. And contrary to many forecasters’ predictions, the PMI published in May showed strong growth, up from 55.0 in March to 55.8 in April.

Part of a wider trend

The strong performance of the services index was matched by good news in other indices published by CIPS, with both construction and manufacturing sectors showing positive growth. Like manufacturing, the services index reveals significant jobs growth and a strong sense of optimism amongst UK firms.

CIPS analysts made it clear that the weakened pound was having an effect on businesses, pushing up oil prices and other purchasing costs, and feeding through into higher inflation. And whilst the service sector as a whole reported strongly positive sentiment, it wasn’t entirely immune to the effects of rising prices, which have squeezed household budgets and led to a contraction of spending in some areas. However, this has generally been more than off-set by an uplift in spend from business-to-business customers and an increase in demand from overseas markets.

Implications

The implications of this positive performance can be seen across financial markets, as good news is priced into equities. But it’s also impacting bond markets, as upbeat economic data is likely to influence the thinking of members of the Bank of England’s Monetary Policy Committee (MPC). Base Rate has been at 0.5% or below since 2009, yet it’s only a matter of time until the MPC’s balancing act between inflation and jobs growth begins to lean towards an interest rate hike.

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