Services PMI beats forecast, but new business slows and inflation rises
UK services firms reported slightly stronger growth than expected in December but growth in new orders fell to a 16-month low, a survey on the dominant sector of the economy revealed on Thursday.
The UK purchasing managers' index from IHS Markit/CIPS showed an improved reading of 54.2 in December from the 53.8 a month earlier and better than the 54.0 consensus forecast. A PMI reading above 50 indicates growth.
Earlier in the week PMI surveys on the UK's manufacturing and construction sectors fell short of expectations but both indicated continuing growth, which when combined with the survey for the economy's largest sector gave a composite PMI for December of 54.9, which was short of the 55.0 consensus and unmoved from the previous month.
Based on historical comparisons, the all-sector survey suggested the UK economy grew at a quarterly rate of 0.4% or 0.5% in the fourth quarter, following the third quarter's 0.4% expansion. This would result in growth for the whole of 2017 at around 1.8%, down from the 1.9% growth in 2016.
While most services executives said business activity growth picked up in the month, new business volumes increased at the slowest pace since August 2016, while employment growth eased to a nine-month low. Businesses said subdued business investment and cost consciousness among clients were weighing on new business sales.
Input price inflation was said to have increased markedly, mostly linked to strong cost pressures, with the fastest rise reported in operating expenses for three months with firms citing higher fuel prices, utility bills, food costs and salaries. Some or all of these input costs are being passed on to customers, with prices charged by the sector continuing to increase across the service sector, though the rate of inflation eased from November.
While business optimism remained below its long-term survey average, it picked up to a seven-month high, with around 43%
of the surveyed managers expecting a rise in business activity over the course of 2018. The confidence was linked to new product launches and, in some cases, hopes of a boost to demand from stronger global economic conditions.
Growth continued to be led by financial services and the hotels and restaurants sectors, IHS found, with the latter likely buoyed by tourist spending rising on the back of the weak exchange rate.
The worst performing sub-sector was again IT and computing, which continued what is its worst performance for over five years, with activity declining throughout the fourth quarter.
The triumvirate of PMI surveys for December indicated a resilient and steady pace of growth, said IHS chief business economist Chris Williamson, though the softer increase in new orders and slowdown in hiring underscored downside risks to the near-term outlook.
Forward looking indicators were mixed across sectors, with inflows of new business showing the second-smallest monthly rise since August 2016, with new order growth hitting a 16-month low in services and a three-month low in manufacturing, while rising to a seven-month high in construction.
"The rise in December’s Markit/CIPS Services PMI will provide some reassurance that the economy did not lose pace at the end of the year, following the disappointingly-weak manufacturing and construction surveys," said economist Paul Hollingsworth at Capital Economics.
But Samuel Tombs at Pantheon Macroeconomics characterised the survey as showing that the sector "still is struggling for momentum", with business activity only recovering to its 2017 average, while new orders and employment growth both eased.
He saw fourth quarter GDP growth being nearer 0.4%, though noted official data for October suggest that a slightly weaker result is likely.
Although inflation remains high, Tombs said: "Labour demand remains too soft to facilitate a pick up in wage growth. As a result, the pressure on the MPC to raise interest rates to keep domestic price pressures in check likely will remain modest, enabling them to wait until the tail end of 2018 before hiking again."