UK service sector under pressure as inflation surges

UK business growth slowed sharply in May, a closely-watched survey showed on Tuesday, as surging inflation hit home.

The S&P Global CIPS UK Services PMI Business Activity Index fell to 53.4 last month from 58.9 in April, the weakest headline reading since February 2021, when the country was in lockdown.

Once falls caused by Covid-19 lockdowns were stripped out, the month-on-month decline was the largest since the survey began in July 1996. May’s reading was, however, ahead of the flash estimate of 51.8.

Respondents said margins had been hit by inflation, with energy, fuel and raw material costs, alongside ongoing wage pressures, leading to a further steep rise in average input prices. Around 70% of respondents said their average costs had risen since April.

Concerns about the economic outlook and heightened risk aversion had also dented customer demand, respondents noted. As a result, growth expectations for the year ahead fell for the fourth consecutive month, to the lowest since October 2020.

The print weighed heavily on the Composite PMI Output Index, which fell to a 16-month low of 53.1 from 58.2 in April. The composite index is a weighted average of the manufacturing output index and the services index.

Tim Moore, economics director at S&P Global Market Intelligence, said: "May data illustrates a worrying combination of slower growth and higher prices across the UK service sector.

"Service providers are increasingly concerned about the near-term business outlook, with price resistance among consumers and escalating cost of living pressures set to dampen spending during the second half of 2022."

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Though there was a glimmer of hope with export orders, which were not as flat as in previous months, Brexit customs restrictions and war in Ukraine continued to impact overseas confidence still further.

"The sudden fall in the overall index is a cause for worry, and was reflected in the sector’s optimism, which is the lowest since the height of the pandemic in October 2020. Recessionary fears are growing bigger and stronger amid the realisation that 2022 as the year of stable recovery has not yet materialised."

Martin Beck, chief economic advisor to the EY Item Club, said: "All three PMIs in May remained above the 50 ‘no-change’ mark separating expansion from contraction. And the indices have been vulnerable in the past to respondents’ sentiment intruding on what is supposed to be a measure of changes in output.

"But added to the drag from high inflation, a decline in health output now that free Covid-19 testing has ended and distortions from June’s extra bank holiday, the latest PMIs reinforce [our] expectation that GDP growth will slow significantly in the second quarter. They also illustrate the dilemma faced by the Monetary Policy Committee in the run up to June’s interest rate decision."