MNI: UK Services Sector Activity Hits Eight Month High in June

-- IHS Markit/CIPS UK Services PMI 55.1 in June vs 54.0 in May

By Jamie Satchi

     LONDON (MNI) - The UK services sector recorded a robust and accelerated

upturn in business activity in June, boosted by a surge in new work and

extending the recovery in growth seen since March's snow-related disruption,

data from IHS Markit/CIPS showed on Wednesday.

     The UK Services Purchasing Managers' Index (PMI) rose to 55.1 in June from

54.0 in May, above the MNI median estimate of 53.9 and the highest reading since

last October. June marks the 23rd successive month that the headline index has

sat above the neutral 50 threshold.

     Survey respondents -- particularly those working in business and financial

services -- reported a general upturn in client demand, while there were also

reports that sunnier weather conditions had boosted consumer spending.

     --NEW WORK SURGES

     Mirroring the trend seen in overall business activity, the data revealed a

robust and accelerated rise in new work, with the rate of new business growth

rising to a level last seen over a year ago.

     Survey respondents attributed the improvement to "successful product

launches, new marketing initiatives and improving economic conditions".

     Firms, however, continued to lament Brexit-related uncertainty. There were

reports that business investment had been held back, particularly in relation to

spending by large corporate clients.

     --BACKLOGS UP

     Stronger demand placed increased pressure on operating capacity, with the

latest data pointing to the biggest rise in order backlogs since July 2015.

Along with higher-than-expected demand, recruitment difficulties also

contributed to the higher volumes of unfinished work.

     --RECRUITMENT DIFFICULTIES

     Employment numbers increased only slightly in June, with the rate of job

creation broadly level with the 13-month low seen in April.

     Some business respondents reported that tight labour market conditions and

squeezed margins had led to the non-replacement of voluntary leavers.

     --DOOR OPEN FOR AUG HIKE

     "Stronger growth of service sector activity adds to signs that the economy

rebounded in the second quarter and opens the door for an August rate hike,

especially when viewed alongside the news that inflationary pressures spiked

higher," said Chris Williamson, Chief Business Economist at IHS Markit.

     According to Williamson, Q2's set of activity surveys point to an increase

in GDP growth to 0.4%, up from the 0.2% recorded in Q1 (recently revised up by

0.1pp on better construction data).

     --COSTS RISE FURTHER

     Business costs rose further in June, driven by higher fuel bills and staff

salaries, according to the report.

     Higher operating expenses resulted in the fastest rate of prices charged

inflation since March. In some cases, service sector firms noted that high

levels of capacity utilisation justified passing on greater costs to new

customers.

     "The sharp rise in business costs, linked to surging oil prices and the

need to offer higher wages, suggests inflation will also pick up again from its

current rate of 2.4%," said Williamson.

     --QUALITY OF GROWTH QUESTIONED

     Despite the improvement in the UK Services PMI notched in June, Williamson

cautioned that Brexit-related concerns are holding back business investment.

     "The survey once again highlights how the business outlook remains clouded

by widespread concerns about the impact of Brexit uncertainty in particular,"

said Williamson.

     "Such a divergence between current and expected future activity stokes

worries that the upturn is being fuelled by short-term spending, based on hopes

that uncertainty will lift, and likely masks a lack of longer-term business

investment," he added.

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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