Services sector returns to growth for first time in four months

The UK’s services sector rebounded back into growth during March at the fastest rate in seven months, following four months of contraction, according to new data.

The closely followed IHS Markit/CIPS Purchasing Managers’ Index (PMI) recorded a score of 56.3 last month, compared with 49.5 in February. Anything above 50 is seen as a sector in growth.

Activity, new orders and employment were all up during March, with optimism hitting highs not seen since December 2006, as businesses prepare for large swathes of the sector reopening as part of the Covid-19 road map.

Forward bookings ahead of lockdown easing later this month helped contribute to an increase in total new work for the sector for the first time in six months.

But early indications showed that high inflation could be on its way, as suppliers struggle to keep up with the pent-up demand, leading to input prices accelerating to their highest levels for nearly three years.

Some parts of the services sector also reported strong growth from the housing market, where homeowners continue to benefit from the stamp duty holiday.

Survey respondents said the pent-up demand and work on projects that had been delayed at an earlier stage in the pandemic also helped contribute towards the growth.

But exports remained subdued, with respondents suggesting the issues over new post-Brexit rules are continuing to keep EU-based businesses away from working with British-based firms.

Subdued orders from overseas were also impacted by Covid-19 restrictions on international travel.

Where there was international growth for UK services businesses, it tended to be found in the US and Asia, the survey found.

The signs of inflation started emerging through increases in costs from fuel, transportation and higher raw material costs for imports.

As a result, the prices charged by service providers rose at the sharpest pace since November 2017.

Tim Moore, economics director at IHS Markit, which compiles the survey, said: “Around two-thirds of the survey panel forecast an increase in output during the year ahead, which reflected signs of pent-up demand and a boost to growth projections from the successful UK vaccine rollout.

“Of the small minority citing downbeat expectations in March, this was often linked to uncertainty about international travel restrictions.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), said: “The dominant service sector moved up several gears into growth with a strong leap in overall output, topped off with a rise in job creation for the first time since the pandemic began at the beginning of 2020.

“Projects in suspension were restarted along with robust plans for future business as new orders rose at the strongest rate since August despite a marginal drop in exports which have remained stubbornly sluggish in recent months.”

He added: “However, regardless of whether the sector’s glass is now half empty or half full, the acceleration in input price inflation to its highest in nearly three years is a worry.”