The slowdown in activity across Britain’s service economy steadied last month, although the rate at which service employers are cutting jobs speeded up.
One hint of a bright spot in the July survey of service activity from the Chartered Institute of Purchasing & Supply and Markit was a finding that prices paid by service companies for their supplies rose at a slower pace than the record set in June.
This could come as some reassurance to the Bank of England’s interest-setting committee when it starts its two-day monthly meeting this morning.
The CIPS noted, though, that the increase in these input prices was still severe, notably in the cost of food fuel and utilities.
Service companies were also still passing on their costs ruthlessly in an effort to protect their margins. The biggest increases here came from those in the transport, storage and communications category.
The overall index of service activity rose marginally to 47.4 – but this was the third month running that that this index has come in under 50, below which any finding indicates a decline.
New orders were drying up, too, for a third month with an overall fall measured by an index reading of 44.7, the lowest in the 12-year history of the CIPS survey.
The main declines in both activity and orders came in what the CIPOS describes as “financial intermediation” and hotels and restaurants.
But it also detected a worrying pointer for the future in fall in the broad business-to-business category. There were several reports of providers of business services saying the troubles of the housing market are having a direct impact on their operations.
“While services activity fell at a slower rate during July, the risks to future trends in the sector remained clearly skewed to the downside, with the record contraction in new business, severe cost pressure and deteriorating sentiment all pointing to difficult times ahead,” said Paul Smith, senior economist at Markit Economics.
“Although oil has started to fall and there is evidence of emerging slack in the economy, the continuation of severe cost pressures and recent utility bill hikes suggest that the inflation profile remains highly unfavourable for a rate cut in the near term.”
Although most respondents to this survey are still looking for a turn for the better by this time next year with an index figure of 56.1 for business expectations, this was an all-time low for the survey.
Roy Ayliffe, director of professional practice at the CIPS, said “July was marked by contractions in activity – particularly in financial services and hotels and restaurants – and further trimming of jobs, as it became increasingly difficult to protect margins from the prevailing economic forces.”
Howard Archer, UK economist at Global Insight, commented “This does not bode well for service sector activity in the near term at least.
“There was some very limited better news on the inflation front for the Bank of England as both the input prices and prices charged indices edged back from June’s levels. Even so they both remain far too high for the Bank’s liking.”
Hetal Mehta, speaking for the Ernst & Young ITEM Club, agreed. “This will be welcomed by the Bank of England, which has been facing the dilemma of high inflation, but slowing economic growth,” he said.
“At the margin, this increases the chances of the Bank keeping rates on hold at five per cent this Thursday.”
