UK Service Sector Growth Accelerates As Economy Reopens

The UK service sector expanded at the fastest pace in more than five years in August as the economy reopened after the lockdown period in the second quarter, final data from IHS Markit showed Thursday.

The IHS Markit/Chartered Institute of Procurement & Supply final services Purchasing Managers’ Index rose to 58.8 in August from 56.5 in July.

This was the highest since April 2015 but the score was below the flash estimate of 60.1.

The current expansion is built on something of a false reality, with the economy temporarily supported by measures including the furlough and Eat Out to Help Out schemes, Chris Williamson, chief business economist at IHS Markit.

These props are being removed. The burning question is how the economy will cope as these supports are withdrawn, Williamson added.

“Policymakers face a huge challenge in sustaining this recovery and avoiding a ‘bounce and fade’ scenario, especially if virus numbers escalate further, in which case we may be looking at a ‘bounce and slump’,” said Williamson.

Despite acceleration in services activity, the survey revealed a setback for employment numbers. Companies linked the fall in payroll numbers to reviews of staffing needs and redundancy measures as their usage of furlough started to wind down.

New orders grew the most since December 2016 largely due to the pent up demand across the housing market and rising spending. However, new work from abroad decreased for the seventh straight month.

Input cost inflation slowed due to subdued wage pressures. Meanwhile, average prices charged by service providers were broadly unchanged since July.

Looking ahead, service sector firms remain optimistic overall that business activity will expand over the next 12 months. That said, the degree of confidence eased for the first time since March.

The composite output index, which combines manufacturing and services advanced to 59.1 in August from 57.0 in July. But this was below the flash score of 60.3.

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