Latest PMI data signals UK economy in good shape

UK business activity growth reaches three-month high, according to latest UK Purchasing Managers’ Index (PMI) survey data.

The IHS Markit/CIPS UK Services PMI Business Activity Index rose to 54.0 in May, up from 52.8 in April.

The figure is the highest reading since February, signalling a strong increase in business activity throughout the UK service economy.

However, new business growth figures for service sector firms remain at one of the lowest levels since the summer of 2016. Brexit-related uncertainty and reduced consumer spending are considered the main reasons for dampened new business growth in May, according to survey respondents.

Employment numbers in the service sector rose only moderately in May, resulting in the second-weakest increase since March 2017. Businesses attribute low recruitment levels to a lack of suitably skilled staff.

Average cost burdens across the service sector increased strongly due to rising fuel bills and an upward pressure on staff wages, as a result of the tight labour market.

Despite the rise in costs, latest data indicates only a modest increase in average prices charged by service providers. Many businesses commented they were unable to pass price increases on due to competitive pressure and low consumer demand.

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey commented: “The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter.

“However, disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence. Measured across all major parts of the economy, new orders growth in the second quarter so far is running at the weakest since the third quarter of 2016.

“Meanwhile, costs are being pushed higher by rising oil prices and wages, although subdued demand means firms are struggling to pass these higher costs onto customers. Average selling prices for goods and services showed the smallest rise for 11 months in May.

“The signs of economic growth rebounding in the second quarter will likely up the odds of the Bank of England hiking interest rates again in coming months, likely August, but with the forward looking indicators suggesting that the economy could relapse, a rate rise is by no means assured.”

Source: https://www.markiteconomics.com/Survey/PressRelease.mvc/a39d74857f5e45d4888efd8c81627950

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All figures correct as at 19.11.2018.