UK services sector makes strong start to 2015

Posted on 5 Feb 2015 by The Manufacturer

Britain’s services sector got a boost from the oil price slump in January with business costs increasing at the slowest pace in five-and-a-half years.

As companies benefit from the slide in the oil prices, January marks the 25th successive month of growth for the dominant services sector.

New business came through the door at an increased rate compared with December and jobs were created at the fastest pace in six months as companies report a strong start to 2015 with the sector growing faster than expected last month according to the Markit/CIPS PMI survey.

Businesses benefited from lower fuel costs, following the halving in oil prices since last summer, with operating costs increasing at the slowest rate since June 2009. Their savings on fuel were partly offset by an increases in staff wages, in the latest sign UK workers can look forward to a period of real pay rises following six years of falls.

Chris Williamson, chief economist at Markit, said that combined with equivalent surveys for the manufacturing and construction sectors, the services PMI indicated a quarterly economic growth rate of just over 0.5%, in line with the fourth quarter of 2014.

“The data will allay fears that the economy is slowing sharply, having merely seen growth cool during the winter to a more sustainable pace,” he said.

City expectations of a smaller rise to 56.3 were beat as the headline services PMI index – combining output, new orders and employment – increased to 57.2 in January from 55.8 in December, where anything above 50 indicates expansion.

James Knightley, economist at ING, said the survey was encouraging.

“With consumer fundamentals being boosted by rising real wages, strong employment and favourable tax changes we are optimistic on the prospects for growth in 2015 more broadly. Political uncertainty remains the main risk to this outlook.”

The services sector accounts for about three quarters of the UK economy, and includes hotels, bars, restaurants, hairdressers, IT and transport.

In the fourth quarter of 2014, services output increased by 0.8%, while manufacturing output was up just 0.1%. January marked the 25th successive month of growth for the sector, with Britain’s recovery hooked on the consumer despite the government’s ambitions to rebalance the economy towards manufacturing and exports.

Williamson said that despite continued services sector growth and signs that pay was starting to rise, the Bank of England was unlikely to change its view on the appropriate timing of the first rise in interest rates because inflationary pressures remained low.

“There seems little likelihood of the [Bank’s] monetary policy committee voting to hike interest rates any time soon, leaving early-2016 as still the most likely time for the first rate hike.”