UK services expand but job cuts cast shadow

The UK's services sector expanded rapidly in August but rising job cuts raised fears the recovery could be short-lived.

The IHS Markit/CIPS services purchasing managers' index strengthened to 58.5 from 56.5 in July as businesses and consumers spent after the end of coronavirus lockdowns. A score of 50 separates expansion from contraction.

The result was the strongest since April 2015, helped by a busy housing market supported by a stamp duty holiday, the government's Eat Out to Help Out restaurant subsidy and a recovery in business services.

But the survey showed signs of excess capacity as work backlogs reduced and a third of respondents reported reductions to staffing levels. Employers shed jobs at the steepest pace since May as the government's furlough programme began to wind down.

Service companies remained optimistic about the next 12 months but confidence weakened for the first time since March as businesses worried about the strength of the recovery as the government withdraws support. Many economists expect a surge in unemployment that could set the economy back once the government's job-furlough programme finishes at the end of October.

Chris Williamson, chief business economist at IHS Markit, said: "A further surge in service sector business activity in August adds to signs that the economy is enjoying a mini boom as business re-opens after the lockdowns, but the concern is that the rebound will fade as quickly as it appeared.

"The current expansion is built on something of a false reality, with the economy temporarily supported by measures including the furlough and Eat Out to Help Out schemes. These props are being removed."

Prime Minister Boris Johnson faced repeated calls from opposition MPs on Wednesday to extend the job support programme. He said the government could not continue to spend money to support people "languishing" at home.

Williamson said: "Policymakers face a huge challenge in sustaining this recovery and avoiding a ‘bounce and fade’ scenario, especially if virus numbers escalate further, in which case we may be looking at a ‘bounce and slump’."