UK services activity rebounds strongly as prices surge, Markit PMI shows

UK services industry output in March was stronger than expected as the sector bounced back strongly from the five-month low on the back of the strongest price inflation since September 2008, though rising prices make a future slowdown more likely.

The seasonally adjusted Markit/CIPS services purchasing managers' index picked up to 55.0 in March from 53.3 in February, ahead of the consensus forecast for only a slight rise to 53.5.

Coming in the wake of the disappointing manufacturing and construction PMI numbers earlier this week, the strong services data meant UK gross domestic product growth is likely slow only slightly in the first quarter of the year.

Markit said business activity and incoming new work both picked up at the strongest rates so far in 2017, with almost half of respondents to the survey survey remaining optimistic about the business outlook for the year ahead and only one in nine fearing a fall in activity.

Cost pressures remained high in March, which led to the fastest rise in prices charged by service sector firms since September 2008.

Input cost inflation continued to rise sharply in March but eased to a four-month low, with the weak pound blamed alongside increased fuel and energy bills, plus stronger salary pressures and higher food prices in March.

This was enough for sterling traders to turn bullish and the pound was lifted nearly half a cent against the US dollar to 1.248 on the news.

“The March uptick in the PMI surveys merely brings the data in line with a neutral policy stance at the Bank of England," said Chris Williamson, chief business economist at IHS Markit.

"As such, the data add to the sense that, with economic and political uncertainty likely to intensify as the Brexit process gets underway, policymakers are likely to continue to stress the need to look through any further upturn in inflation and focus instead on the need to keep policy on hold to support economic growth.”

Sam Tombs at Pantheon Macroeconomics said the services activity growth remains well below the sorts of rates that would persuade the Bank of England to hike interest rates this year.

The March PMI leaves it only matching its 20-year average, he noted, while the decline in the manufacturing and construction PMIs means that a weighted-average of the three points to quarter-on-quarter GDP growth slowing to about 0.5% in Q1, from 0.7% in Q4.

With retail sales on track to fall by about 1.5% quarter-on-quarter in Q1 and energy output likely to have been depressed by unusually mild weather, he calculated that GDP rose by 0.4% quarter-on-quarter in Q1.

Tombs added that the sector looks vulnerable to slowing further now that businesses are passing on higher costs to customers in earnest, noting that in the past, the business activity index has tended to fall over the following six months whenever the output prices balance has sustainably exceeded 52.

Neil Wilson at EXT Capital agreed. Noting that financial services was the most resilient sector while consumer-oriented sectors struggled, he said this was "evidence that chimes with data suggesting consumers might be about to pull back on some discretionary spending as inflation squeezes incomes. Inflation is overtaking wages and that means one thing – lower aggregate demand."