UK services surge as new business and hirings rise

Following last month’s lull, the UK’s services sector surged forwards in February at its fastest pace in almost a year, keeping the idea of an interest rate increase in play, according to observers.

Three service sector workers, working on Macs
The UK’s powerhouse services sector notched up a surprising surge in output last month with new business at its highest level since last May.

UK services sector output surges ahead of predictions

The IHS Markit/CIPS UK Services purchasing managers’ index (PMI) showed a reading of 54.5 in February, well above analysts’ expectations and up from 53.0 in January in an index where any reading above 50 indicates growth.Growth in the sector, which accounts for more than three-quarters of the UK’s GDP, rose to a four-month high with companies taking on new staff in a bid to handle the increase in new business. There was a particularly marked rise in B2B sales growth, reflecting an improvement in the global economy.

UK growth an interest rate increases

Chris Williamson, IHS Markit’s chief business economist, said the sector’s growth kept the prospect of an interest rate increase in May by the Bank of England “very much in play”.“The service sector overtook manufacturing as the fastest growing part of the economy in February for only the second time since the referendum, thanks to the combination of the largest rise in services activity for four months and waning growth of factory output,” he said.“With the construction sector also pulling out of the stagnation seen in January, the economy as a whole picked up some momentum again in February, despite the slowing in manufacturing.“The PMI surveys so far collectively point to the economy growing by nearly 0.4 per cent in the first quarter to indicate that a resiliently steady pace of expansion has been maintained.”Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, said that, underlying the PMI, were indications that UK consumers were remaining cautious.“In fact, it was business customers that had the confidence to forge ahead with orders, as consumers hesitated over concerns about possible rate rises impacting on their household budgets and what the future could hold,” Mr Brock said.“But it was encouraging to see job-seekers were the winners as hiring levels continued to rise and at the fastest rate since September 2017. Firms were eager to reduce accumulated backlogs in part created by difficulties in finding talented, skilled staff and in a period of exceptionally low unemployment.”
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Employment and orders buoy the sector

Jeremy Cook, chief economist at WorldFirst, added, “Higher orders and higher employment buoyed the service sector in February with the global economic recovery allowing for an uptick in new business. Interestingly, price pressures weakened to their lowest in 18 months and may limit the immediate need for a rate rise from the Bank of England at the May meeting.“It is good news that the pressures on margins and costs from exchange rates have been seen to lessen in the past few months or so with UK SMEs maintaining a very ‘wait-and-see’ approach to hedging.”

CBI reports broad growth

Publication of the PMI on Monday coincided with a survey from the Confederation of British Industry (CBI) suggesting that private sector growth, including manufacturing, retail and services, had picked up recently.Rain Newton-Smith, the CBI’s chief economist, said, “It’s good to see firm growth in the UK economy this month and expectations of growth into next quarter also look positive.“However, both businesses and consumers continue to grapple with uncertainty over the economic outlook and Brexit, so the government must help counter this by intensifying its focus on the domestic agenda, with industrial strategy leading the way to deliver higher productivity and living standards.”On Friday, the Markit/CIPS PMI for the construction sector showed an unexpected rebounded in February, hitting 51.4, up from January’s four-month low of 50.2 but still shy of the 2017 average of 52.3.
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