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Coronavirus: UK services sector sees sharpest increase in activity since 2015

Edmund Heaphy
·Finance and news reporter
·3-min read
The Sun is seen rising behind skyscrapers of the City of London financial district, as the spread of the coronavirus disease (COVID-19) continues in Britain, June 2, 2020. REUTERS/Toby Melville
The services sector is hugely important to the UK economy, accounting for around 80% of the country’s output. Photo: Toby Melville/Reuters

The UK services sector experienced its sharpest rise in business activity in more than five years in August, as consumer spending recovered in the wake of the coronavirus crisis.

A closely watched survey by IHS Markit found that the sector’s purchasing managers’ index (PMI) reading came in at 58.8 in August, above the 56.5 from July, and sharply higher than the record low of 13.4 in April.

Though the figure came in below the 60.1 that analysts had expected, it is still the highest result since April 2015.

The services sector is hugely important to the UK economy — it includes finance, law, retail, engineering, and consulting — and accounts for around 80% of the country’s economic output.

READ MORE: Almost 11% of UK stores are vacant as pandemic hammers high street

PMIs are an indicator of private sector activity and are given on a scale of 1 to 100. Anything above 50 signals growth, and anything below means contraction.

Because PMIs measure rate of change, even this rapid expansion of activity does not mean that the sector has recovered from the impact of the crisis. Output still remains far below pre-pandemic levels.

But the higher volumes of business activity in August were linked to a post-lockdown bounce in business and consumer spending, IHS Markit said on Thursday.

Last month also saw the sharpest increase in new work since December 2016, with respondents referencing pent-up demand in the housing market, a boost from the government’s Eat Out to Help Out scheme, and a gradual recovery in demand for business services.

“A further surge in service sector business activity in August adds to signs that the economy is enjoying a mini boom as business re-opens after the lockdowns, but the concern is that the rebound will fade as quickly as it appeared,” said Chris Williamson, the chief business economist of IHS Markit.

“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,” he warned.

The Eat Out to Help Out scheme concluded at the end of August, while the government’s wage-subsidy scheme is due to be wound down at the end of October.

The end of the furlough scheme was one of the factors cited for a sharp drop in employment numbers in the sector.

READ MORE: Bank of England governor backs end of furlough scheme

Some 34% of respondents reported a drop in staffing levels in August, with just 11% reporting a rise. Firms saw a reduction in backlogs of new work and begun to implement redundancy measures, IHS Markit said.

Growth in costs in the sector slowed last month, with respondents pointing to “subdued” wage pressures.

And while firms in the sector remain optimistic about an expansion of business activity over the next 12 months, the degree of confidence fell for the first time since March.

“Policymakers face a huge challenge in sustaining this recovery and avoiding a ‘bounce and fade’ scenario, especially if virus numbers escalate further,” said Williamson.

The data follows Tuesday’s PMI reading from the manufacturing sector, where output grew at its fastest pace since May 2014.