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UK service sector growth slows as costs hit record high

·Business Reporter, Yahoo Finance UK
·3-min read
People walk over Millennium Bridge in London, UK
New order growth came in at its weakest level so far this year, while UK business confidence also dropped to its lowest in a year and a half amid concerns about the sharp cost of living crisis. Photo: Reuters/Henry Nicholls

Growth in the UK service sector began to slow in April as soaring inflation and the war in Ukraine took their toll in the second quarter.

New order growth came in at its weakest level so far this year, while business confidence also dropped to its lowest in a year and a half amid concerns about the sharp cost of living crisis.

Overall, the S&P Global services PMI reading stood at 58.9 last month, down from 62.6 in March, the softest rise in activity since January.

It did, however, mark the 14th straight month of expansion in the sector, as any reading above 50 indicates growth.

It came as input costs rose at the fastest pace in close to 26 years of data collection, with energy, fuel and wages all widely reported as being up in price over the month.

“There were widespread reports from panellists of increased fuel costs, with higher energy charges and wages also key contributors to rising cost burdens,” S&P said.

Read more: FTSE rallies ahead of Bank of England interest rate decision

More than two thirds of respondents noted a rise in input prices over the month. In turn, companies raised their own charges at a pace that was only fractionally below March's record.

Although the current geopolitical conflict limited expansion, the data suggested that companies continued to benefit from the lifting of COVID-19 related restrictions, with a number of firms highlighting the positive impact of freer international travel.

New business from abroad was broadly unchanged for the second month running, while a recovery in international travel helped some firms to secure greater volumes of new export orders.

Service providers continued to expand their staffing levels sharply in response to rising new business volumes. Employment increased for the fourteenth month running, albeit at a slightly slower pace.

A combination of this increase in capacity and slower new order growth meant that companies were able to keep backlogs of work broadly stable during April, following 13 months of accumulating outstanding business.

But there were still some reports that staff shortages and difficulties securing materials led to delays completing projects.

Read more: Property: UK building works face labour and supply shortages

Andrew Harker, economics director at S&P Global, said: “The twin headwinds of the cost of living crisis and the war in Ukraine started to bite on the UK service sector during April, as evidenced by a sharp slowdown in new order growth to the lowest in the year so far. Worryingly, companies seem to be expecting impacts to be prolonged.

“While the aforementioned headwinds are of concern, companies were still able to generate growth of activity and new work as the sector continued to benefit from the relaxation of COVID-19 measures and in particular the easing of travel rules.

“Firms will be hoping that these benefits are not completely drowned out by the hit to demand from the cost of living crisis in particular."

Watch: Economy 'surged higher' in March but risk to growth intensifies as firms raise prices

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