UK Services PMI hits 24-year high amid Spring economic high

• UK service sector growth fuelled by consumer spending
• UK Services PMI shows record strength after expanding at the fastest rate in 24-years
• FTSE 100 slips further into red territory
• US private sector growth raises hopes of a Spring economic boom

On Thursday, IHS Markit/CIPS confirmed that the UK service sector expanded at its fastest rate in 24-years during May, as Britons returned to pubs, restaurants and bars after months of coronavirus restrictions.

According to IHS Markit/CIPS, Britain’s Services PMI jumped to 62.9 in May from 61 the previous month. The figure beat initial estimates of a jump to 61.8 and took the survey to its highest level since 1997.

Britain’s robust economic rebound is being driven by the ongoing relaxation of COVID-19 restrictions, with the next round of coronavirus easing due to commence on June 21st.

Although ministers could delay the June 21st unlocking due to the rapidly spreading Indian variant, earlier this week, UK Prime Minister Boris Johnson hinted that there was no evidence to suggest that ministers needed to delay reopening plans.

Thursday’s UK Services PMI and news that the June 21st unlocking date is going ahead as planned have also helped bolster the British pound (GBP).

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate is trading 0.1% higher at USD 1.4124 and could attempt a move towards USD 1.42 if the upbeat mood around pound Sterling (GBP) remains intact.

Meanwhile, the British pound to euro (GBP/EUR) currency pair is trading near one-month highs at EUR 1.1658.

Although the improved covid vaccine rollout in the EU has pushed the euro (EUR) higher in recent weeks, GBP/EUR could accelerate to the EUR 1.17 level this month if ministers give the June 21st reopening date the greenlight.

IHS Markit data also revealed that Britain’s labour market has started to show positive signs as employment grew at the fastest rate in six years, courtesy of coronavirus easing measures.

UK employment climbs to six-year highs

According to the latest figures from the Office for National Statistics (ONS), Britain’s employment rate surged at the fastest pace in six years as furloughed workers returned to the business and employers hired new staff.

The ONS revealed that there were 1.3m fewer people on furlough in March and April, reducing the number of workers on the scheme to 3.4m.

Although some firms have said that they have been forced to raise wages due to staff shortages, the number is in stark contrast to figures seen at the height of the pandemic last year when more than 9m workers were on furlough.

Experts are confident that the employment rate will increase further in May when most of the services sector’s workforce returned from furlough.

UK Chancellor Rishi Sunak was delighted with the data and said he hopes that this number will continue to decline as the scheme winds down to a close.

Mr Sunak noted that there are many job opportunities available in the labour market and urged people to take advantage of that while we continue to support those in need through to September.

His comments come after Cabinet Office Minister Michael Gove said the UK government was “open-minded” about extending the furlough scheme beyond September.

IHS Markit Director Tim Moore stated that “the latest survey results suggest that the UK is experiencing a Spring economic boom.

“Today’s Services PMI has set the scene for an impressively striking rebound in Q2 2021, fuelled by the reopening of consumer-facing parts of the economy following months of COVID-19 lockdowns.”

The release of pent-up demand has also boosted other sectors of the UK economy, including manufacturing and industrial production. Britain’s Composite PMI stormed to its highest level since the series began last month, up from 60.7 in April to 62.9 in May.

Britain’s improved economic outlook saw the Organisation for Economic Cooperation and Development (OECD) upgrade its forecast for the UK economy earlier this week. The OECD now expects UK gross domestic product (GDP) to rise by 7.2% in 2021 versus previous estimates of 5.1%.

However, the OECD warns that it will take longer for Britain to return to its pre-crisis levels than other G7 nations due to the severity of the economic slump in Q2 2020 and Brexit.

The improved economic situation in the country has also failed to shake financial market fears about the potential Spring economic boom dwindling due to a shortage of skilled workers and supply pressures.

Although recent data has shown that the UK COVID recovery is well underway, the figures also revealed that strong demand creates price pressures, which feeds into deeper concerns about higher inflation.

The Bank of England (BoE) said they expect inflation to run higher but return to sustainable levels over the medium term, but economists and market analysts appear less optimistic.

Increased spending feeding into fears over higher inflation

Rising operational costs are spilling over into services prices, with data from IHS Markit revealing that cost inflation has surged to the highest level in over a decade.

Although the Bank of England (BoE) has been relatively calm about price hikes, fears that a solid economic rebound will trigger higher inflation are mounting.

The Services PMI revealed that prices charged by businesses within the services sector have climbed to the highest levels since the survey began in 1996, with firms citing increases in staffing costs, transport bills and materials as the reason for higher prices.

Separate data from the ONS revealed that the Consumer Price Index (CPI) more than doubled during April, up from 0.7% in March to 1.5% month-on-month.

Although the figure remains below the BoE’s 2% target rate, increased consumer spending activity could fuel another surge and force the central bank to take policy action.

Duncan Brock, head of the Chartered Institute of Procurement & Supply (CIPS), said: “Shortfalls in talent mean the best candidates are in high demand and demanding higher wages – creating the highest inflationary rise in business costs since 2008.

“As basic living expenses increase due to price hikes, employers will face further pressure for salary rises.”

The stock market performance suggests that something is amiss with global risk appetite, with investors weighing up concerns about higher inflation with economic growth.

FTSE 100 slides ahead of US labour data

After a relatively strong week, London’s blue-chip FTSE 100 Index has slumped ahead of the weekend as traders mull over UK data and changes to the British government’s travel traffic light system.

At the time of writing, the FTSE 100 is 5.17 points lower at 7,059.18, with travel shares leading the rout. After hitting fresh highs earlier this week, the midcap FTSE 250 has also tumbled and is down by 6.57 points to 22,795.83.

Travel shares tumbled after Britain’s Transport Secretary Grant Shapps announced that Portugal would be moved from the green list to the amber list – dampening millions of Brits summer holiday prospects.

US markets also finished lower, with the Nasdaq Composite Index closing 141.82 points or -1% lower at 13,614.51 and the Dow Jones Industrial Average down by 23.34 points to 34,577.04.

US stocks went lower following the release of positive American labour market data and the US Services PMI, which reignited concerns over higher inflation and the possibility that the US Federal Reserve will have to raise interest rates to support the economy.

According to IHS Markit, US Services PMI jumped up from 64.7 in April to 70.4 in May – exceeding preliminary estimates of 70.1

Meanwhile, the US ISM Services PMI surged to a record high of 64 last month, up from 62.7 in April as firms increased capacity amid growing demand.

In terms of the labour market, the boost in services triggered a surge in US private-sector job growth, with more than 950,000 jobs added to private US companies in May.

The data marked the most substantial job growth for the private sector in 11 months, with the relaxation of coronavirus restrictions fuelling a swift recovery in the labour market.

According to the report, which was conducted by Automatic Data Processing (ADP) in collaboration with Moody’s Analytics, the service sector created 850,000 jobs last month.

Of those jobs, 440,000 came from the leisure and hospitality sectors, 139,000 were added to education and health services, and 118,000 were created in the transportation and utility sectors.

An additional 128,000 were added to employment in the goods-producing sector, reflecting an expansion across construction and manufacturing sectors.

Traders are now awaiting the Labor Department’s release of US jobs data, which is expected to show that employment levels jumped up by 664,000 in May following April’s 266,000 increase.

The US unemployment rate is also expected to decline from 6.1% to 5.9% month-on-month.