Sunday 16 December 2018

Service sector growth slows and prices rise at fastest rate since 2008

The latest IHS Markit/CIPS services purchasing managers’ index showed a reading of 53.8 in November, down from October’s six-month high of 55.6.

Services figures
Services figures

By Holly Williams, Press Association Deputy City Editor

Growth in Britain’s powerhouse services sector was pegged back last month as firms hiked prices at the fastest pace for nearly a decade in the face of soaring costs.

The latest IHS Markit/CIPS services purchasing managers’ index (PMI) showed a lower-than-expected reading of 53.8 in November, down from October’s six month high of 55.6.

A reading above 50 indicates growth.

Firms in the sector struggled amid Brexit uncertainty, while new order growth was hit as consumer spending suffered a “double whammy” effect of rising prices and weak wage growth, according to the report.

Services firms passed on surging costs to consumers at the fastest rate since February 2008, it added.

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply (CIPS), said: “Businesses could no longer fight against the tide of higher prices for food, fuel and salaries as input cost inflation remained close to its strongest for six years.

“The level of new order growth lost some momentum, as inflation also ate away at household incomes for a double whammy effect on the UK population reluctant to spend,” he added.

The result comes as a disappointment after robust performances from the manufacturing and construction sectors last month, while economists had also been expecting a services PMI reading of 55 for November.

But Chris Williamson, chief business economist at IHS Markit, said the upbeat figures from the other sectors of the economy last month should help offset the services slowdown.

He said: “Despite the weaker service sector expansion, the latest survey data indicate that the economy is on course to enjoy robust growth in the fourth quarter.

“The survey data are so far consistent with the economy growing at a quarterly rate of 0.45% in the closing months of 2017.”

The report showed that, while service firm’s optimism over the outlook picked up, the flow of new work increased at a slower pace and the rate of staff hiring was the joint-slowest since March.

Many services firms have been knocked hard by Brexit-fuelled import costs, as well as surging business rates, fuel prices and salaries after the launch of the national living wage.

But their efforts to offset this by rising prices comes at a tricky time for the British consumer, with households in the grip of the longest income squeeze since the 1950s.

The Bank of England also raised interest rates for the first time in a decade in November, from 0.25% to 0.5% to curb inflation.

Howard Archer, chief economic adviser at the EY ITEM Club, said the Bank “will not be happy” with the price rises revealed in the PMI.

He is forecasting growth to remain at 0.4% in the fourth quarter, but added that “much will depend on how well the services sector performs and how much consumers spend over the crucial Christmas period”.

Press Association

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