Service sector sees input costs hit fresh highs

Growth in the UK service sector slowed last month, a closely-watched survey showed on Thursday, as cost pressures built.

The S&P Global CIPS UK Services PMI Business Activity Index was 58.9 in April, ahead of both consensus and the flash estimate, of 58.3. It was, however, down on March’s 62.6 and the softest rise in activity since January.

Respondents said they had benefited from the removal of Covid-19 restrictions and greater demand for international travel during the month.

But strong inflationary pressures and the war in Ukraine limited the pace of expansion, with new business growth slowling sharply and business confidence slumping to a year-and-a-half low.

Input costs rose to the greatest extent since July 1996, with significant rises in energy, fuel and wages.

As result, the S&P Global CIPS UK Composite PMI Output Index – a weighted average of the comparable manufacturing and services PMI indices – eased to 58.2, from 60.9 a month earlier, a three-month low although it was also ahead of consensus, for 57.6.

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.

“Worryingly, companies seem to be expecting impacts to be prolonged. Indeed, cost pressures show little sign of abating, with inflation even accelerating in April to the strongest in almost 26 years of data collection.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: “The invasion of Ukraine exacerbated the problem of disruption and cost increases, with driver shortages, clean access to borders and higher wages and energy hikes adding to these obstacles.

“Businesses were forced to pass on costs to consumers at a similar rate, potentially reducing the pool of demand for hospitality and services in the coming months.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The fall in the services PMI shows that the intensifying squeeze on households’ real disposal incomes is starting to slow the economy recovery.

“The future activity and new orders indices of the composite survey fell more sharply in April that the PMI, and to within touching distance of their long-run averages. This points to more subdued quarter-on-quarter growth in GDP, of about 0.5% in the second quarter as a whole.”

Tombs added that once the decline in both retail sales and government activities was accounted for, along with the extra bank holiday in June, GDP was more likely to fall in the second quarter, by around 0.4%, “with only modest growth thereafter”.

However, Katie Cousins, analyst at Shore Capital, said: “Despite cost inflation, the war in Ukraine and near historic lows in consumer confidence, the service sector remains robust. It is aided by Covid restrictions being lifted, enabling international travel to resume, and employment increasing rapidly. Compared to other sectors of the economy, we think the service sector will continue to perform well.”

Questionnaires were sent to a panel of 650 service sector companies between 11 and 27 April. A reading over 50 indicates expansion while a reading below 50 indicates contraction.