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UK service sector grows at fastest pace in 24 years

·Contributor
·4-min read
LONDON, UNITED KINGDOM - 2021/05/27: Transparent partitions used to preserve social distance seen inside a bar in soho area. (Photo by May James/SOPA Images/LightRocket via Getty Images)
Non-essential retailers reopened to in-store shoppers across the UK in April, and pubs and restaurants were permitted to serve customers outside. Indoor dining then resumed in England on 17 May. Photo: May James/SOPA Images/LightRocket via Getty Images

The UK services sector saw its strongest rise in business activity since May 1997 last month as the hospitality and retail sector continued to enjoy the lifting of COVID restrictions across the country.

According to IHS Market’s monthly purchasing managers index, the services sector rose to 62.9 in May, from 61.0 in April, beating market expectations of 61.8, highlighting how the UK economy is recovering from the health crisis.

Any score of above 50 indicates growth. The data were collected between 12 and 26 May.

It was driven by resurgent business and consumer spending, leading to the strongest rate of employment growth for just over six years as business brought workers back from furlough and hired new staff members. 

Survey respondents mostly cited better-than-expected client demand, however there were many reports suggesting difficulties with staff availability, especially among consumer service providers.

Backlogs of work also built up due to a jump in forward bookings, stretched capacities and staff shortages.

According to IHS Market’s monthly purchasing managers index, the services sector rose to 62.9 in May, from 61.0 in April, beating market expectations of 61.8. Chart: IHS Markit, CIPS
According to IHS Market’s monthly purchasing managers index, the services sector rose to 62.9 in May, from 61.0 in April, beating market expectations of 61.8. Chart: IHS Markit, CIPS

It came as non-essential retailers reopened to in-store shoppers across the UK in April, and pubs and restaurants were permitted to serve customers outside. Indoor dining then resumed in England on 17 May following months of lockdown.

Earlier this week the Organisation for Economic Cooperation and Development (OECD) forecast that Britain would see the fastest growth of any major economy this year.

Meanwhile, input cost inflation reached its highest since July 2008. A combination of strong demand and rising operating expenses resulted in the steepest increase in prices charged by service providers since the survey began in 1996.

Around 20% of the survey panel reported an increase in their average prices charged in May, while only 3% signalled a reduction.

Strong inflationary pressures did little to dampen business expectations for the year ahead, with confidence drifting down only slightly since April, the survey said. The index remained close to March's 14-year high and signalled a strong degree of optimism about near-term business activity growth.

Read more: European markets head lower as UK ministers mull reopening delay

The latest survey results set the scene for an eye-popping rate of UK GDP growth in the second quarter of 2021, led by the reopening of customer-facing parts of the economy after winter lockdowns,” Tim Moore, economics director at IHS Markit, which compiles the survey, said.

“The successful vaccine roll out has generated a strong willingness to spend and fortified business optimism across the service economy.

“However, inflationary trends intensified in May as suppliers passed on higher transport bills, staff costs and raw material prices. Imbalanced demand and supply appears to have spread beyond the manufacturing sector, which contributed to the steepest rise in prices charged by service providers since the survey began in July 1996.

Watch: What is inflation and why is it important?

Elsewhere, services firms across the euro area posted their strongest growth in almost three years. Markit’s Eurozone services PMI rose to 55.2 in May, up from 50.5 in April, and the highest level in almost three years.

Ireland and Spain reported the fastest services growth, followed by France.

The IHS Markit Italy Composite PMI rose to 55.7 in May, signalling the quickest expansion in Italian private sector output for over three years, as services saw the first upturn since last July and manufacturing output growth remained amongst the strongest on record.

Germany recorded the slowest expansion, although its service sector did start to revive last month. It was buoyed by the partial easing of lockdown measures and a surge in new business as progress in the coronavirus vaccine rollout helped spur confidence and demand.

Watch: COVID-19: UK economy forecast to see strongest annual growth since 1941

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