'Eye-popping' growth in UK's services sector

Activity in the UK's all-important services sector recorded its largest growth in 24 years last month, according to an international business survey.

The IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose to 62.9 in May, representing its highest level since May 1997 in an index where any figure above 50 represents growth.Publication of the services PMI on Thursday came two days after the index for UK manufacturing showed a reading 65.6, the highest since the survey began in 1992.Both indices illustrated the surge in activity following the easing of months of lockdowns prompted by the coronavirus pandemic. The only worrying finding in the services PMI was the fact companies were struggling to hire the skills they needed as vacancies increased.Tim Moore, economics director at IHS Markit, said the successful rollout of the UK's Covid-19 vaccination programme was proving a major boost to the economy, whose growth forecast for this year was substantially increased by the OECD earlier this week."The latest survey results set the scene for an eye-popping rate of UK GDP growth in the second quarter of 2021, led by the reopening of customer-facing parts of the economy after winter lockdowns," said Mr Moore.“Pressure on business capacity due to a spike in demand and staff hiring difficulties emerged as a major challenge for service sector companies in May. Job creation was the strongest for over six years, but backlogs of work accumulated to the greatest extent since the summer of 2014.“The successful vaccine roll out has generated a strong willingness to spend and fortified business optimism across the service economy."The survey found that staff numbers in services rose by their most in more than six years, with businesses bringing back furloughed staff and hiring new ones where they could. There were, however, reports of continuing shortages with some firms having to raise pay offers as a result.Duncan Brock, group director at CIPS (Chartered Institute of Procurement & Supply), said businesses had rushed to increase their operational capacity to meet the increase in demand but were struggling to fill job vacancies."As staff moved on to other opportunities following the pandemic’s impact on lives and priorities, a potential skills gap in the sector means some firms may struggle to meet their new goals," he said."This shortfall in talent meant the best candidates were increasingly in demand and demanding higher wages, adding to the highest inflationary rise in business costs since July 2008."We will see more pressure for salary rises, as basic living becomes more expensive for everyone as the hike in prices charged by service companies was the highest since 1996.”Meanwhile, growth in the eurozone services sector last month was at its highest in almost three years, the PMI standing at 55.2, up from 50.5 in April.Growth in Ireland reached a record high of 63.5 while Spain's reading of 59.2 was the highest in more than 14 years. France, Germany and Italy all recorded more modest rises.

Read more news and views from David Sapsted.

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