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Services recovery ramps up, but inflation weighs on firms’ outlook – report

·3-min read

The recovery in Britain’s all-important service sector got back on track in October, but firms faced record cost pressures amid soaring inflation, new figures have shown.

The closely-watched IHS Markit/CIPS UK Services PMI survey recorded a reading of 59.1 last month, up from 55.4 in September and the strongest growth since July after growth had recently stalled.

A score above 50 is considered to show growth.

The report put the acceleration down to the reopening of the UK economy and looser international travel restrictions, with the first increase in new order growth for five months and the best month for export sales since June 2018.

But supply chain disruption, staff shortages and surging fuel and energy costs saw operating expenses and prices charged by service providers ramp up at the steepest rates since the survey began in July 1996.

The woes and cost pressures have had an impact on business optimism, which fell to its lowest level since March, according to the report.

While the survey index pointed to the second-fastest rise in employment in the sector since June 2014, firms still reported “severe difficulties” in filling vacancies despite hiking wages to attract candidates.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), said: “The dominant service sector in the UK economy had a surprisingly good month in October with a strong uptick in overall output, job creation and new orders as business and consumers began to spend again, unfettered by lockdown and pandemic restrictions.

“This rise in activity was driven by the domestic market but also export orders rising to the largest extent since 2018 as travel opportunities opened up and pandemic savings were spent on holidays and hospitality.”

He added: “Escalating business costs remain deeply concerning as salaries rocketed along with fuel and energy costs, and material shortages as a result of supply chain disorder.”

There are also fears over the impact of potential interest rate rises, with speculation mounting that the Bank of England may act as soon as its meeting on Thursday to rein in costs.

Mr Brock said: “The seemingly likely rise in interest rates this week may take some of the heat out of the overinflating UK economy but will also result in additional pressure on some household budgets, threatening to cut off this stream of good fortune early next year.”

The report said the readings show a “widening gap” between service and manufacturing growth, coming after data on Monday revealed factory activity grew at its slowest pace for eight months due to supply and staff shortages.

Martin Beck, senior economic advisor to the EY ITEM Club, said October’s services PMI offered “some reassurance that the economic recovery is far from out of steam”.

But he said: “More evidence of inflationary impulses building may bolster those MPC (Monetary Policy Committee) members on the verge of voting for higher interest rates in November’s meeting.

“But tomorrow’s decision still looks to be on a knife-edge.”

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