By Halo Financial Team
It is a case of what you want first – the good news or bad news – in February’s UK service sector report.
Here is the good news
Being optimists, let’s start with the good news! The IHS Markit UK Services Purchasing Managers' Index (PMI) rose to 51.3 following January’s half-year low at 50.1. In addition, the market had expected it to fall to below 50, which would have signalled a market contraction.
As a result, the Pound initially rose a little against its major currency partners. Halo Financial’s Founding Director, David Johnson, says, “The markets were cheered by the better-than-expected result and the Pound briefly hit above 1.319 in typical interbank rates. With the services sector making up four-fifths of the UK economy, it’s usually a market moving figure.”
However, the Services PMI is still on track for its weakest quarter since Quarter 4, 2012, with an average reading 50.7 so far in Quarter 1, 2019.
Costs slow, allowing discounting
The main positive development, the report says, was a slowdown in costs inflation to the weakest level since May 2018, which provided scope for some promotional discounting. Softer cost pressures, intense competition and efforts to stimulate sales resulted in the slowest rise in average prices charged by service providers since last September.
Now the bad news
Brace yourselves! Here comes the bad news. There is quite a lot of it – with Brexit taking much of the blame…
Hiring outlook at seven-year low
Employment numbers fell at the fastest rate for more than seven years as businesses delayed staff hiring due to subdued demand and concerns about the immediate economic outlook. Voluntary leavers were not being replaced and the tight labour market was making it more difficult to hire suitably skilled staff.
The Brexit brake
Many service sector firms say that Brexit-related uncertainty is the most pressing factor they are facing, acting as a brake on business activity growth. Political uncertainty had resulted in delays to corporate spending decisions and a general rise in risk aversion among clients.
New work levels fall
There has been a reduction in new work received, although the rate has slowed since the start of 2019. Surprise! Surprise! Where a decline in new work was reported, this was often linked to heightened Brexit uncertainty. Some firms also cited a tendency among European clients to delay committing to new projects.
Top performing sector
By far the best-performing broad category of activity was Computing and IT businesses in the three months to February 2019. The robust and accelerated upturn in business activity, was supported by the sharpest rise in new work since mid-2018. Computing and IT service providers are much more upbeat about the year-ahead business outlook than the rest of the service sector.
Transport and Communication decline
Transport and Communication recorded the only reduction in business activity, with the steepest decline in more than six years. In addition, higher fuel prices contributed to another round of strong input cost inflation.
Chris Williamson, chief business economist at IHS Markit, says, “The latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU. The data suggests the economy is on course to grow by just 0.1 per cent in the first quarter.” “Worse may be to come when pre-Brexit preparatory activities move into reverse.”
If you’re concerned about the service sector or Brexit, talk to us and see how we can help.