Growing confidence helps bolster UK services sector

The slowdown in the UK services sector eased last month, a closely-watched industry survey showed on Wednesday, as optimism continued to build on the back of the vaccine rollout programme.

The seasonally-adjusted IHS Markit/CIPS UK services PMI business activity index was 49.5 in February, up sharply on January’s 39.5, although it undershot the flash estimate and consensus for 49.7.

The index has posted below the neutral 50.0 level since November 2020, but February’s reading indicates the slowest decline in output since then. A reading below 50.0 indicates contraction, while one above it indicates growth.

The composite PMI, a weighted average of comparable manufacturing and services indices, was 49.6, compared to 41.2 in January. That was also a revision of the flash estimate - for 49.8 - and marginally below consensus.

Tim Moore, economics director at IHS Markit, said: "It appears that the third national lockdown has seen limited spill-overs to parts of the economy beyond the scope of the government-mandated closures.

"While customer-facing businesses continued to report severe constraints on activity due to the pandemic, there were signs of growth in technology and some business services after a disappointing start to 2021."

Staffing levels in the services sector decreased at the slowest pace since the start of the pandemic in March 2020, the survey found, although IHS Markit conceded that the furlough scheme had ""softened the level of job shedding among consumer service providers.

Improving optimism towards the business outlook had also helped stabilise employment, however. Business expectations among services providers for the next 12 months improved notably, with the vaccine rollout and hopes of a sustained recovery leading to the highest level of confidence since December 2006.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "The dominant services sector bounced back in February, and although remained in the contraction zone, presented a more positive picture than at the start of the year.

"The rain on this parade comes in the form of the highest rise in input costs since February 2020, which is being passed on to consumers at a faster rate, as shipping, fuel and fresh food deliveries went up in price.

"Added to this, the true employment picture is still hidden by extended furlough schemes, making any surge in UK consumer spending limited if job insecurity ramps up and inflation rears its ugly head."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The composite PMI technically is an indicator of month-to-month growth in business activity, but we are relatively confident that GDP will recover modestly in February despite the sub-50 reading.

"Many firms don’t fill in the survey properly, and simply provide their general sense as to whether conditions are good or bad. This means that PMI tends to understate the initial recovery after a large fall in demand.

While the third national lockdown has shuttered hospitality and closed schools, it has not been as stringent as the first one, with many sectors and businesses - including building sites, takeaways, estate agents and childcare provision - allowed to remain open.