3 July 2008
The UK service sector continued to buckle under the pressure of rapidly rising costs and deteriorating demand in June, with activity declining at the second fastest rate in the survey history and incoming new work falling at a record pace. Reflective of surging crude oil prices, inflationary pressures intensified, with average costs increasing at a record pace, which contributed to net job cuts as companies lost confidence in the economic outlook.
The headline index from the report, the seasonally adjusted CIPS/Markit Business Activity Index posted a reading of 47.1, its lowest level since October 2001. The index had shown some resilience around the turn of the year, stemming the downward trend following the onset of the credit and Northern Rock crises late last summer. However, June's reading marked the fourth successive monthly fall in the index as the continuation of tight credit availability and rising costs took their toll.
The seasonally adjusted Incoming New Business Index posted a reading of 45.1 - the lowest reading in the survey history as companies reported that cost pressures and the uncertain economic climate were weighing on clients' spending by depressing confidence and leading to the postponement of investment decisions. In particular, the Hotels & Restaurants and Financial Intermediation sectors fared particularly badly.
June's survey data showed the impact of the oil price shock on companies' operating costs as the seasonally adjusted Average Input Prices Charged Index came in at 71.7 to indicate a marked acceleration in the rate of inflation to a fresh survey high. Alongside the impact on fuel and energy costs, suppliers' charges increased, while there were some reports that the relative weakness of sterling was raising import costs. In a bid to prevent further substantial erosion of their margins, a number of companies raised their average output prices, the net result being the third strongest rate of charge inflation in the survey history.
Companies blamed a lack of incoming new business and pipeline projects for the latest contraction of outstanding work in the services sector. Nonetheless, this rate of contraction was only marginally slower than May's record.
With overall workloads down, and escalating costs at their units, there was further inevitable downward pressure on staffing levels in the sector. Employment fell for a second successive month, albeit at a weaker rate than May's survey record, as the seasonally adjusted Employment Index posted a reading of 47.6.
The trends in activity, new business and costs combined to markedly depress confidence in the sector. With fears that rising prices and faltering demand will lead to recession, the seasonally adjusted Business Expectations Index came in at 59.4 - its lowest level in the twelve-year survey history.
Commenting on the UK Services PMI survey, Roy Ayliffe, director of professional practice at the Chartered Institute of Purchasing and Supply (CIPS), said: "Purchasing Managers in the UK services sector saw conditions deteriorate further in June, as they battled against a combination of intensifying inflation and weakening demand. Hotels and restaurants and financial services companies fared the worst with significant falls in new business.
"Of particular note, was the dramatic effect surging oil prices had on firms' operating costs, with suppliers pushing up prices to offset the pain they are feeling from soaring fuel and energy costs. A weaker pound also added to service providers' woes, as confidence about future performance in the sector plummeted to its lowest in twelve years."
Paul Smith, senior economist at Markit Economics said: "Following on from the dreadful figures for both construction and manufacturing, the services report confirms the broad-based deterioration in UK economic activity, with the composite PMI plunging to a series low - and heading towards unprecedented (for the UK PMI surveys) recession territory.
"The issues facing the service sector are rooted in the dual shocks of both the financial crisis and, of rapidly increasing concern to service providers, surging global oil prices. Sentiment is down sharply and budgets are being eroded by escalating costs, with the net result in June the awful combination of a record fall in incoming new work and another survey high rise in input costs.
"Desperate to anchor inflation expectations and avoid a dreaded wage-price spiral, support to growth from the BoE by way of a reduction in borrowing costs seems unlikely to be forthcoming at this time. However, if conditions in the labour market soften further, and spare capacity continues to increase, resulting in real wage restraint and natural downward pressure on prices, the next significant change in rates could be down."
