Service sector

UK service sector growth hits highest level in 8 months as Omicron wave fades

UK services sector: The rates of expansion in business activity and new orders accelerated sharply during the month, supporting stronger job creation. Photo: Rob Pinney/Getty Images

UK service sector growth rebounded to an 8-month high in February amid increased activity and new orders as the Omicron wave subsided.

According to IHS Markit’s PMI of business activity, the reading rose to 60.5 in February from 54.1 the previous month, signaling a sharp increase in output. This is the fastest increase since June 2021.

Any reading above 50 indicates growth.

The expansion rates of business activity and new orders accelerated sharply during the month, supporting stronger job creation.

Respondents said market demand and customer confidence have improved alongside reduced pandemic-related disruptions, supporting business growth.

The February reading climbed to 60.5 in February from 54.1 the previous month, signaling a sharp increase in production.  Chart: IHS Markit, CIPS

The February reading climbed to 60.5 in February from 54.1 the previous month, signaling a sharp increase in production. Chart: IHS Markit, CIPS

Similarly, new business grew at a much faster pace amid the easing of pandemic restrictions, and the strongest in eight months.

There were numerous reports of improving demand in the US, while new higher orders from European customers were also seen.

However, inflationary pressures also intensified during the month. The cost of a range of inputs has increased, with wages, fuel and utilities being the most widely mentioned. Costs for food and other materials would also have been higher due to supply shortages.

The pass-through of higher prices to customers has resulted in the fastest pace of fee inflation on record, according to the new data.

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Rising workloads and the prospect of further growth in the coming months have led service providers to increase their workforces, extending the current streak of job creation to a year. The latest employment increase was the fastest since October last year.

Although job growth was strong in February, IHS said there were still reports of difficulties finding staff. Additionally, businesses are faced with shortages and a backlog of backlogs.

“This cost pass-through to customers will most likely prompt the Bank of England (BoE) to raise interest rates again at the next Monetary Policy Committee (MPC) meeting in March,” said Andrew Harker, economic director at IHS Markit.

“While the latest round of PMI data was encouraging, the inflationary picture still has the potential to limit growth, while it remains to be seen what the impact that the Russian invasion of Ukraine will have on the service sector and the wider economy.

“As such, there are still downside risks, even if the disruption caused by the pandemic finally seems to be fading.”

Read more: How Russia’s War on Ukraine Affects Stock Prices

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, added: “As the geopolitical situation changes, businesses may find it difficult to maintain the current pace.

“If supply is disrupted and prices rise again to add to this month’s near-record inflation, businesses could be back to square one and unable to pass on their higher costs to consumers who faced the biggest price hike in a generation this month.”

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