UK economy ‘close to stagnation’ despite service sector growth
The UK service sector beat analysts’ expectations to reach a three-month high in May, according to survey data released today by IHS Markit and the Chartered Institute of Procurement & Supply (Cips).
Read more: UK manufacturing sector shrinks to 34-month low
Nevertheless, IHS Markit said the UK economy is “close to stagnation” as Brexit and a global slowdown drag on growth in the service sector, having sent manufacturing into contraction in May.
The services purchasing managers’ index (PMI) – a closely-watched gauge of the industry’s health – rose to 51.0 in May from 50.4 in April. This was above analysts’ expectations of 50.6. A score over 50 indicates growth.
A modest rebound in new business boosted the sector, which saw the biggest rise in employment since November 2018. Business optimism improved to its best score in eight months as bosses predicted stronger growth.
The news came a day after IHS Markit and Cips showed the manufacturing sector contracted sharply in May. Manufacturers blamed Brexit as they reported it was much harder to convince clients to commit to new contracts last month as export business fell.
Despite Brexit being extended until 31 October, a no-deal scenario is increasingly likely as Conservative leadership candidates play up their hard-Brexit credentials to the Tory membership, who will vote on the next leader.
Chris Williamson, chief business economist at IHS Markit, said: “Although service sector business activity gained a little momentum in May, with growth reaching a three-month high, the pace of expansion remained disappointingly muted.”
“The PMI surveys collectively indicated that the UK economy remained close to stagnation midway through the second quarter,” he said.
An increase in employment in services was linked to long-term business expansion plans and efforts to boost capacity, IHS Markit and Cips said.
Input costs rose due to higher staff wages amid record-low unemployment and increased transport costs due to rising energy prices. Yet inflationary pressures eased overall in May, with the rate of cost inflation dropping to a 12-month low.
“While a small expansion in the sector is positive, we must be realistic – many services firms remain understandably cautious in the current environment,” said Chris Sood-Nicholls, managing director and head of global services at Lloyds Bank Commercial Banking.
“Employment in business and consumer services continues to grow, fuelled by those subsectors that are enjoying continued demand,” he said.
Read more: UK business confidence lowest since 2012
He added: “That said, as we have already seen with manufacturing, an important consideration for some professional services firms will be whether their current high volumes can be maintained.”