Slowest Growth of UK Service Sector for 19 Months in July
July’s survey signalled continued growth of the UK service sector economy, albeit at a modest rate as temporary factors and a tough economic climate continued to weigh on activity and business.
Margins remained under pressure as strong market competition led to discounting of charges, while input prices continued to rise – in spite of evidence of falling fuel costs.
After accounting for seasonal factors, the headline Business Activity Index registered 51.0 in July, down from 51.3. Although above the 50.0 no-change mark for the nineteenth consecutive month, July’s reading was the lowest in that period.
Temporary factors – poor weather in the first half of July and, in some instances, disruption in the lead up to the Olympics – combined with a tough economic climate depressed growth during July.
Where a rise in activity was recorded, this was in part linked to a natural increase following the additional bank holidays in June and also to gains in new business. According to survey respondents, promotional work and the release of new products supported contract wins in July.
However, there were reports that the operating environment remained challenging, with companies indicating that uncertainty amongst clients had led them to defer making business decisions.
Despite new work rising at a faster rate than activity, UK service providers were again able to make inroads into levels of work outstanding. July marked the third successive month that backlogs have fallen, with the latest reduction the sharpest since November 2011.
An increase in employment was recorded in the latest survey period, extending the current run of growth to eight months. The modest increase in payroll numbers reflected a combination of increased new order volumes and the recruitment of staff in a bid to bolster sales.
Average input prices continued to rise during July amid some reports that suppliers were passing on their own higher costs. There was also evidence of increased food costs. However, with fuel prices reported to have declined, the overall rate of inflation was historically low.
Competitive pressures and soft underlying demand encouraged discounting amongst UK service providers in July. Average output charges subsequently fell for a third successive month.
Finally, business sentiment remained in positive territory in the latest survey period as companies expect to benefit from increased investment and new product releases. However, the degree of confidence remained well below the long-run survey average reflecting concerns over the UK macro-economic climate.