The services sector expanded at its slowest pace in three months in June, but growth remained resilient despite rising interest rates and economic uncertainty weighing on demand, a closely watched survey has shown.
The S&P Global/CIPS UK services purchasing managers’ index eased to 53.7 last month, down from 55.2 in May, well above the 50 level that indicates growth.
Samuel Tombs, at Pantheon Macroeconomics, the consultancy, said: “The recovery in services output lost a little momentum in June, but it still is holding up well in the face of rising interest rates.”
Services companies, which make up more than 80 per cent of the economy, continued to hire as more people looked for work. Staffing levels rose at the fastest pace since last September, although higher wage bills increased costs for businesses and offset falling energy and transport costs. The survey indicated that businesses and consumers continued to spend despite inflationary pressures. However, higher interest rates were a having a particular impact on services related to construction and property sales.
The Bank of England unexpectedly raised interest rates from 4.5 per cent to a 15-year high of 5 per cent last month as inflation held at 8.7 per cent and after Andrew Bailey, the Bank governor, said there were signs that inflation would be slow to cool.
Tombs said that a fall in prices growth had modestly eased the pressure on the Bank to increase rates by a further half-point next month. “Nonetheless, the ratesetting monetary policy committee will need to see price rises slow over a period of at least a few months before it is willing to call time on its hiking cycle,” he said.
Markets expect interest rates to rise above 6 per cent this year.
New business fell to a four-month low in June and Tim Moore, at S&P Global Market Intelligence, said services sectors were showing “renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand. Widespread increases in salary payments offset falling fuel bills and energy prices.”
John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “With the UK economy still a hair’s breadth away from recession, companies will be making modest plans for future business this year rather than for the highs experienced in the last few months.”
The services PMI survey came after data for the manufacturing sector on Monday, which contracted for an 11th month in a row as factories faced disappointing demand at home and abroad. Taken together, the composite PMI index showed the country’s private sector fell to a three-month low of 52.8, in line with the flash estimate.
Martin Beck, chief economic adviser to the EY Item Club, the forecasting body, said the PMI surveys had been a relatively poor leading indicator of gross domestic product recently because GDP data “has been heavily influenced by factors not captured by the surveys, such as the impact of strikes on public sector output and idiosyncratic factors like May’s extra bank holiday”. He expects the drag from such factors to fade in the coming months.
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UK services sector growth drops to slowest pace in three months