Services sector basks in the warmth of leisure spending

Services sector basks in the warmth of leisure spending

5 Jun    Finance News, News

The UK’s dominant services sector continued its growth streak last month as consumers kept spending on leisure and technology.

Survey data from services companies, known as the purchasing managers’ index (PMI), hit 55.2 in May, down a little from April’s 12-month peak of 55.9 but up slightly from an initial estimate of 55.1 and well above the 50 mark that indicates growth in the sector.

Britain’s services industry, which accounts for almost three quarters of the economy, has motored along despite fears of a broad economic slowdown caused by high inflation and rising borrowing costs. The UK economy is not expected to fall into recession this year but will post only modest rates of growth until 2024.

Business surveys have shown an increasing divergence between different parts of the economy this year, with manufacturing suffering from a prolonged downturn while the service-based industries have benefited from consumers spending more on leisure, travel and tourism after the pandemic.

The survey of purchasing managers found that inflation in the sector rose to the highest since February as companies were facing higher operating costs as a result of rising wages for employees. This in turn led to businesses increasing the cost of their services, a phenomenon which threatens to keep inflation persistently high.

Inflation has already failed to come down in line with expectations this year, partly as a result of companies’ pricing power and still strong wage growth for workers, who want compensation for high inflation. The survey also found that some consumers were pushing back against rising prices by taking their business elsewhere.

Tim Moore, economics director at S&P Global Market Intelligence, which helps to compile the PMI survey, said: “Higher salary payments more than offset lower fuel costs, which meant that overall input price inflation edged up to its strongest for three months in May.”

In signs that the strong labour market may be slowing down, the rate of new jobs in the services industry slowed again last month, despite some businesses still complaining of labour shortages.

The sector was also boosted by strong inbound tourism in the UK at the start of summer and exports strengthened on the back of better economic prospects in the US and Europe. About half of businesses said they expected their activity to grow over the coming year.

John Glen, chief economist at the Chartered Institute of Procurement and Supply, said that rising consumer spending “seemed to be at odds with the continuing cost of living crisis”.

“The service sector was running in the opposite direction to the declining manufacturing sector in the UK, powering ahead with another strong rise in new orders including work from overseas and rising tourist numbers. Optimism was high, with half of all respondents predicting a strong year ahead, keeping positivity close to April’s recent peak,” Glen said.

Equivalent PMI data from the eurozone fell to a three-month low in May, as the continent’s manufacturers dragged down growth with the worst performance since the end of last year. The services sector closely matched the UK, with output at 55.1 in the single currency area, down from 56.2 in April.

In China, the world’s second largest economy, the service sector had its best performance since November 2020 as the country benefits from the end of stringent lockdown measures.

Mirroring the pattern seen in other countries, Chinese consumers are switching their spending from goods to services, helping to boost services even as other industries continue to falter. China’s Caixin measure of PMI in services was up to 57.1 last month, from 56.4 in April.

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