Inflation and pent-up demand cools services sector recovery

The services sector, which includes leisure, hospitality and retail, remains strong following the easing of lockdown but slowed in May.
Shoppers in masks
PA Wire
Simon Neville5 July 2021

The UK’s all-important services industry continued its rapid recovery, although the speed of growth cooled from highs set in May, according to new data.

The closely-followed IHS Markit/CIPS Purchasing Managers’ Index (PMI) recorded a reading of 62.4 for June – down from 62.9 for May, but still representing some of the fastest growth in output for 24 years.

Any score above 50 is a sign of a sector in growth.

This return to robust activity should have service providers relieved at the new opportunities after lockdown, but a modicum of doubt has crept in.

Duncan Brock, CIPS

Strong recoveries as the hospitality and leisure sector reopened after lockdown restrictions were eased helped drive the growth.

But bosses are reporting the pent-up demand is having an impact on supply chains, with heavy delays and inflation at record rates both in prices charged by suppliers and subsequently passed on to customers.

Increased raw material prices and greater transportation charges were the main factors pushing up costs.

The Bank of England’s former chief economist recently warned that inflation could hit 4% this year and Governor Andrew Bailey said last week inflationary pressures could be here for the rest of the year – although he said it should subsequently ease over time.

Job shortages are also impacting the sector, with companies struggling to fill vacancies quickly enough, leading to higher staff wages.

People waiting for service
PA Wire

The turnaround has led to the fastest rate of job creation for seven years, the survey found.

Backlogs to business and unfinished projects due to the high demand hit their steepest level since the survey started in July 1996, researchers added.

Survey respondents said they had seen a surge in demand for consumer services and a continued boost from looser pandemic restrictions on trade.

There were also reports citing new project launches and higher levels of business investment in response to the improving economic outlook.

But despite the strong growth in the UK for services, companies reported a slight fall in export sales, with international travel restrictions and uncertainties about quarantine policies the most commonly cited factor.

Some firms also said Brexit-related issues had dampened export orders to the EU.

Tim Moore, economics director at IHS Markit, which compiles the survey, said: “The service sector recovery remained in full swing during June as looser pandemic restrictions released pent up demand for business and consumer services.”

He added: “The latest survey data highlighted survey-record rates of input cost and prices charged inflation across the service sector, reflecting higher commodity prices, transport shortages and staff wages.

“Imbalanced supply and demand was the main driver, while the roll-back of pandemic discounting by some service providers amplified the latest round of price hikes.”

Duncan Brock, group director at the CIPS, said: “This return to robust activity should have service providers relieved at the new opportunities after lockdown, but a modicum of doubt has crept in.

“Optimism dropped to the lowest since January, while restricted international travel depressed overseas orders and interrupted supply lines as shortages increased.

“The rush to build operating capacity meant skilled labour became increasingly expensive too, adding to the cost burden woes.”

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in