UK service sector recovery slows again in July

According to the report from IHS Markit/CIPS, UK service providers recorded an increase in business activity for the fifth month running during July, but the rate of growth was the weakest since March. Staff shortages and supply issues were a severe constraint on business capacity, which led to another strong rise in backlogs of work. Tight labour market conditions led to greater wage pressures across the service economy and this contributed to the fastest increase in overall input costs since the survey began in July 1996. Prices charged by service sector companies also rose at a survey-record pace.

At 59.6 in July, the headline seasonally adjusted UK Services PMI Business Activity Index posted above the crucial 50.0 no-change mark and was above the earlier 'flash' reading (57.8), but dropped from 62.4 in June. The index was the lowest since March and therefore signalled the slowest rate of expansion since the end of the winter lockdown. Staff shortages, supply chain issues and the end of the full stamp duty holiday for residential property sales were cited as factors leading to a slowdown since June.

A substantial loss of momentum was seen for new business growth during July, with this index the lowest since February. While many firms commented on strong consumer spending and a sustained recovery in demand for business services, there were also reports that COVID-19 isolation rules had negatively influenced sales volumes.

Job creation continued at a brisk pace in July, reflecting strong demand for staff across the service economy. However, the rate of employment growth slipped to a three-month low, which survey respondents often attributed to unexpected staff departures and delays with finding suitably skilled candidates.

Finally, the latest survey indicated that service sector companies remain highly upbeat about their growth prospects for the year ahead. Around 57% predict an expansion, while only 9% anticipate a decline in business activity. However, the degree of confidence has now slipped for four months in a row and the latest reading was the lowest since January.