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The Actuary The magazine of the Institute & Faculty of Actuaries

UK service sector growth at five-month low

Growth momentum in the service sector continued to slow in February after a 17-month peak in September 2016, according to IHS Markit and the Chartered Institute of Procurement and Supply (CIPS).

Service sector is the main driver of growth in the UK economy ©Shutterstock
Service sector is the main driver of growth in the UK economy ©Shutterstock

Their Purchasing Managers’ Index (PMI) released today, reveals that higher business costs were the main negative development for the industry last month, rising to the steepest pace seen since 2008.

This was largely due to the fall in value of Sterling, with rising input costs leading to the largest increase in prices charged by service providers for almost eight-and-a-half years.

CIPS director of customer relationships, Duncan Brock, said: “The UK service sector continued to lose momentum in February, which causes concern that the main driver of growth in the UK economy is losing some vitality.

“Exchange rate depreciation, rising energy costs and higher wage bills all had a profound impact on prices-charged inflation, which was the highest since September 2008.

“Cautious consumer spending had a moderating impact on pricing power, but firms were still compelled to increase their charges to customers in anticipation of more cost pressures to come.”

Input prices, and prices charged for the service sector over the last 20 years are shown below:

Source: IHS Markit
Source: IHS Markit
Source: IHS Markit
Source: IHS Markit

The UK’s service sector accounts for 78.4% of GDP, with the latest index giving a score of 53.3 for the industry, down from 54.5 in January, but broadly in line with its average of 53.2 for 2016.

Despite the softer pace of growth last month, business confidence remains strong, with service providers indicating that optimism is unchanged from the post-referendum high recorded at the start of this year.

“Overall, the economic picture remains more positive than many expected after last year’s vote to leave the EU,” Hargreaves Lansdown senior economist, Ben Brettell, said.

“A PMI reading above 50 shows the sector is still expanding, albeit at its slowest pace since September. The survey showed that business confidence remained strong, and sentiment about the rest of the year was largely positive.

“Nevertheless, with uncertainty still rife over how and when the UK will actually leave the EU, and survey data pointing to a modest slowing of activity, the Bank of England looks most unlikely to consider raising interest rates in the near to medium term.”

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