UK's services sector remains 'in full swing' in June - as inflationary pressures grow

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

The closely-followed IHS Markit/Chartered Institute of Procurement & Supply (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.

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

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But bosses are reporting that 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.

The sector - a major driver of the UK economy - last month saw some of the fastest growth in output for 24 years. Picture: Lisa Ferguson.

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

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The Bank of England s outgoing chief economist Andy Haldane recently warned that inflation could hit 4 per cent this year, and its governor Andrew Bailey said last week that inflationary pressures could be here for the rest of the year, but should subsequently ease over time.

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

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.

"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.

Rollback

"Imbalanced supply and demand was the main driver, while the rollback of pandemic discounting by some service providers amplified the latest round of price hikes."

Cips’ group director Duncan Brock 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."

Martin Beck, senior economic advisor to the EY Item Club, said June’s PMI figure marked an “exceptionally strong” pace of activity growth.

He added that the EY ITEM Club expects that the UK’s gross domestic product grew by more than 5 per cent quarter on quarter in Q2, and believes it “likely that a period of above-target inflation will persist through the year, but this could well prove to be transitory”.

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