Resilient consumer demand boosts UK service sector

The UK service sector saw output strengthen in May, a closely-watched survey showed on Monday, as firms benefited from resilient consumer demand despite higher input costs.

The latest S&P Global/CIPS UK Services PMI Business Activity Index was 55.2, down marginally on April’s 12-month peak of 55.9 but still above the neutral 50.0.

A reading above 50 indicates growth while one below suggests contraction.

The print was broadly in line with both consensus and the first estimate, for 55.1.

Respondents said input costs had continued to rise, with the latest round of inflation the strongest for three months, largely due to higher wages. Average prices charged also rose steeply.

However, the survey also showed that consumer demand had remained resilient during the month, with cautious optimism about the near-term growth outlook contributing to "robust" rises in output and incoming new work.

The composite PMI – a weighted average of comparable manufacturing and services indices – was 54.0, down marginally on April’s 54.9 and largely in line with expectations. Rising services activity helped offset a fall in manufacturing production during the month.

Tim Moore, economics direct at S&P Global Market Intelligence, said: “Service sector businesses have experienced strong growth so far in the second quarter of 2023, fuelled by resilient demand for consumer and technology services, combined with a post-pandemic tailwind as households switched from spending on goods to services.

“Higher salary payments more than offset lower fuel costs, which meant that overall input price inflation edged up to its strongest for three months in May.”

John Glen, chief economist at the Chartered Institution of Procurement and Supply, said: “The service sector was running in the opposite direction to the declining manufacturing sector in the UK, powering ahead with another strong rise in new orders, including work from overseas and rising tourist numbers.”

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “Recovery in the private sector is gathering momentum. While the composite PMI edged down, it remained consistent with a 0.4% quarter-on-quarter expansion in GDP in the second quarter.

“Even so, we don’t think May’s PMI survey will not be enough to convince the Monetary Policy Committee that they have acted strongly enough to bring inflation back to target. A further 25 basis point hike, to 4.75%, at this month’s meeting now is almost inevitable, and a 5% peak in August looks probable.”