Service sector rebound as businesses say they are more optimistic about future
The UK's services sector has seen a rebound with companies reporting brisk trade, according to a new survey..
In January, business activity saw a speedy increase, the higest level seen for eight months. Tim Moore, economics director at S&P Global Market Intelligence, believed that there has been a "revival" in the sector's performance since the start of the year.
The survey by S&P Global/CIPS revealed that the growth exceeded expectations, with a reading of 54.3 up from 53.4 in December. This score indicates a third consecutive month of growth for the sector, indicating things are moving in the right direction.
The sector's strong results are thanks in part to improved customer confidence and increased consumer spending, despite ongoing cost-of-living pressures. The services sector includes businesses like pubs, restaurants, transport providers, real estate and financial service firms.
These enterprises reported that economic conditions were looking up, sparking hopes of falling interest rates. However, they also pointed out that many households were still feeling the strain of financial pressures. This, despite the positive attitude, was still dragging on demand.
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Even with these pressures, it's clear that business in the sector is growing - not shrinking, marking its best performance since May last year. Tim Moore said: "New orders have also rebounded this winter as receding recession risks and looser financial conditions led to greater willingness to spend among clients."
Cost inflation also hit its joint-lowest level since February 2021, offering some relief to businesses benefiting from lower fuel and energy costs, and falling raw material prices. However, the pressure to increase staff wages continued to push up business expenses, which some firms suggested had led them to hold back on hiring.
January's PMI survey also showed that businesses were feeling significantly more optimistic about the future. Just over half of those surveyed forecast a rise in business activity throughout 2024, while just 12% predicted a reduction, amid hopes that improved economic conditions would support growth plans.
However, other firms reported that geopolitical worries, Brexit trade frictions and UK political uncertainty could all limit business activity in the year ahead. Mr Moore said: "Another uplift in business confidence in January provides a signal that elevated levels of geopolitical uncertainty have yet to exert much of a constraint on service sector growth projections for 2024."
Samuel Tombs, chief UK economist for Pantheon Macroeconomics, suggested that the stronger sector performance could prompt the Bank of England to "take its time" when it comes to cutting interest rates. The Bank's Monetary Policy Committee (MPC) keeps a close eye on the services sector, looking for evidence that increasing activity is fuelling a rise in prices.
Mr Tombs said: "January's PMI data adds to evidence that the economy is quickly escaping the minor recession it likely experienced in the second half of last year. The MPC doesn't need to see services CPI (Consumer Prices Index) inflation return to target-consistent rates before it cuts rates, but slow progress towards that goal over the coming months might delay the first cut beyond May, the date we currently expect."
* An AI tool was used to add an extra layer to the editing process for this story. You can report any errors to [email protected]
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