Service sector

UK economy falters as Omicron wave hits service sector

Britain’s economy faltered in January, a closely watched survey showed on Monday, after the rapid spread of Omicron took a heavy toll on the services sector.

the flash IHS Markit/CIPS UK Composite Output Index fell to an 11-month low of 53.4, from December’s final reading of 53.6. Most analysts were expecting a rise, with consensus at 54.0.

In this context, the flash index of manufacturing production strengthened to reach a five-month high of 53.8 against 53.6 in December. But the manufacturing PMI fell from 57.9 to 56.9, while the services business activity index was 53.3, an 11-month low from 53.6 in December.

IHS Markit noted: “With hospitality, leisure and travel struggling due to Omicron restrictions, this has offset resilient growth in business and financial services.”

Manufacturers held up better during the month as material shortages began to ease. But staff absences hit all sectors, while input cost inflation remained “stubbornly high”, largely reflecting stronger cost pressures in the services sector.

Chris Williamson, Chief Economist at IHS Markit, said: “A resilient rate of economic growth in the UK in January masks wide variation between different sectors. Consumer-facing businesses have been hit hard by Omicron, and manufacturers have reported a worrying further weakening in growth in the order book, encouragingly robust.

“Looking ahead, while the Omicron wave meant the hospitality sector was plunged into a third sharp downturn, those restrictions are now being eased, meaning this downturn is expected to be brief.”

Duncan Brock, Group Director at Chartered Institute of Purchasing and Supply, said: “While professional and financial services in particular saw an upturn in activity, hospitality and travel businesses took another hit as the market stagnated.

“In the darkest month of the year, what is also disappointing for the UK economy is the return of price inflation in full force, with the second biggest increase in business spending since 1998 .

“The private sector may feel like it’s taking two steps forward and one step back with pricing and supply challenges, but with the highest level of optimism since August 2021, we can expect to a more favorable trading environment in the coming months.”

Macroeconomics Hall of Fame noted: “The further decline in Markit’s composite PMI in January suggests that the Omicron variant continued to weigh on activity in the first half of the month.

“As things stand, we think GDP fell another 0.2% month-over-month in January, after falling around 10.0% in December.

“The decline in the composite PMI is unlikely to deter investors. [Bank of England’s] Monetary Policy Committee hikes the Bank Rate at next week’s meeting. For starters, some of the survey’s forward-looking indicators have improved: the services survey’s new orders index rose from 56.5, and businesses are the most optimistic about the demand outlook since August.

“Furthermore, near real-time data shows that activity has started to pick up as January progresses, indicating monthly GDP growth in February is likely to be positive.”

The survey was sent to panels of around 650 manufacturers and 650 service providers, with responses collected between January 12 and 20.