Service Sector Recovery Gathers Momentum as Index Hits Twenty-Six Month High

The October CIPS/Markit UK Services PMI figures, released today, show:

• The headline seasonally adjusted Business Activity Index registered 56.9 in October, up from September’s 55.3, and the highest in twenty-six months.
• The rate of expansion was the strongest since September 2007, and respondents attributed growth to higher market demand.
• Price discounting supported sales growth in October, albeit to a lesser extent than in recent months. Average output prices fell for a twelfth successive month, though the latest fall was only modest, reflecting in part continued rises in input costs.
• Input prices rose at a solid rate that was the fastest for eleven months. Higher energy and fuel bills, as well as a weak sterling exchange rate, were noted as sources of inflation.
• October saw a further fall in work outstanding, though the latest decline was only modest and the weakest in nineteen months. In a number of cases higher levels of new work actually tested capacity.
• There were further reductions in employee numbers, extending the current period of decline to eighteen months. Job losses were linked to company restructuring and cost cutting. However, the latest contraction was the slowest in over a year.
• The overall degree of confidence was lower than September’s twenty-nine month high, with some respondents indicating concern over price discounting and expected public sector spending cuts.

Paul Smith, Senior Economist at Markit Economics said:

“Growth of the UK service sector gathered momentum in October, accelerating to the fastest in over two years with the headline index, which covers around 40% of the UK economy, currently consistent with quarterly growth in excess of 1% at the start of Q4.

“Although services employment continues to fall at a historically marked pace, latest developments in output and demand auger well, with growth in October again supporting the view of a stabilisation of payroll numbers in early 2010. However, looking further ahead, a real improvement in jobless numbers to anything resembling close to pre-crisis levels will require growth to be sustained around the present rate for some considerable time”.

Release: Markit Economics [PDF].

Note: The CIPS/Markit UK Services PMI covers transport & communication, financial intermediation, business services, personal services, computing & IT and hotels & restaurants.

The index is a “diffusion index”, it is calculated by adding together the percentage of respondents that reported an improvement plus half of the percentage that reported no change. Results will vary around the 50.0 “no-change” level. Readings above 50.0 signal an improvement, readings below 50.0 a deterioration. The greater the divergence from 50.0, the greater the rate of change anticipated by respondents.

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