UK services come through relatively unscathed in May -UPDATE

Date: Thursday 07 Jun 2012

-Headline business activity Index posts 53.3 for second successive month
-Incoming new business rises at marked and accelerated pace
-Employment increases at solid rate, despite fall in confidence to five-month low

The Markit/CIPS service sector purchasing managers’ index for the month of May has come in at 53.5 points, the same as last month.

The consensus estimate was for a reading of 52.4.

That on a marked gain for incoming new business which buoyed confidence sufficiently – although it fell to the lowest level of 2012 so far- so as to have enticed employers to take on new workers to meet heightened demand.

Interesting as well, Marketing and an improvement of confidence in some sectors were reported to have been behind the seventeenth successive month of new business growth in May.

Similarly, backlogs of work were described as “little changed.”

The above, however, did come at a “price” with average output charges being cut in May, following just two months of marginal inflation, due to strong competition and client pressure to reduce fees. As well, competition for new business was described as fierce.

Thankfully those pressures coincided with a marked fall in input cost inflation to its lowest since October 2009. Latest data showed the weakest rise in purchase costs for 31 months amid reports of lower fuel prices. Where input costs increased, respondents commented that suppliers were passing on their own higher charges.

Finally, business expectations remained in positive territory, with 50% of the survey panel signalling positive expectations for the year ahead.

For Paul Smith, Senior Economist at Markit, “(…) Of course, exceptional circumstances prevail, with the Eurozone debt crisis continuing to undermine service sector confidence, which slipped to a five month low in May. Moreover, although we remain convinced that the GDP figures are overstating the extent of the downturn – and this view is borne out not only by the surveys, but also by labour market data – it’s hard to get away from the fact that the UK economy remains relatively fragile.

“With the All-Sector PMI falling to a six-month low in May and signs from the surveys that pipeline price pressures are waning, the chances of further action from the BoE may just be rising again.”

Commenting on today’s data economists at Barclays are pointing out that, “(…) However, the business expectations index dropped to 69.2 (from 72.6) and now indicates that business expectations are below their long-run average. Some firms pointed to the difficult economic environment, the on-going euro area crisis as well as a post-Olympics lull in activity as reasons for expecting lower output in the future.

(…) The services PMI survey is closely watched by the MPC. We think the current reading is unlikely to lead the MPC to expand QE as it announces it monetary policy decision at noon today. We think that the majority of the committee remains unconvinced of the need for additional policy loosening and it will take further bad news from the economy to warrant policy action.”

AB

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