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New orders deliver boost to UK service sector

The UK’s dominant services sector was boosted by a surge in new orders and rising business confidence last month, underscoring a recent recovery in private sector output.

A closely watched survey of businesses, compiled by S&P Global, reported the best month for new order volumes in the services sector for a year. This was accompanied by falling cost price inflation in the services sector and a rise in export demand.

The services purchasing managers’ index (PMI), which reflects total output across the sector, fell back from 53.5 to 52.9 in March but remained above the 50 mark that signals growth. It means output in the growth-driving services sector averaged 51.7 in the first quarter of the year after contracting at the end of 2022.

The UK avoided a recession at the end of last year and is expected to register positive but weak growth figures in 2023. A global decline in gas prices will help push down headline inflation rates, while government support for household energy bills is expected to boost consumer spending power.

The PMI survey reported the fastest growth in services exports since 2014 due to economic recoveries in leading markets such as the US and Europe. “Some firms attributed the turnaround in export sales to a recovery in business travel and subsequent opportunities to boost sales in overseas markets,” the survey said.

John Glen, chief economist at the Chartered Institute of Procurement and Supply, said the survey “could trigger hopes that a turnaround is finally on the horizon for the UK economy” after growth stalled at the end of last year.

“Consumer confidence improved, adding to levels of orders on the domestic front, while the highest rise in exports since September 2014 added another cheerful note,, Glen said.

In mixed news for the Bank of England, companies said they were still passing on their rising staff wage bills to customers but at the slowest pace since April 2021.

The Bank’s monetary policy committee is closely watching inflationary developments in the services sector to assess whether interest rates need to keep rising after 14 months of monetary tightening.

Companies said that staff salaries remained one of their biggest sources of expense, with falling fuel and commodity prices partly offsetting these costs in March.

Huw Pill, the Bank’s chief economist, hinted on Tuesday that borrowing costs could rise again to quell the “persistence in domestically generated inflation”. The Bank rate has been raised from 0.1 per cent to 4.25 per cent since December 2021.

Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said that flat employment in the service sector and an overall drop in output inflation would prevent the Bank from raising rates again in May.

He said: “The monetary policy committee needn’t stamp on signs of a nascent recovery in economic activity by raising Bank rate further at its upcoming meetings.”

Read more:
New orders deliver boost to UK service sector

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