Service sector

UK services sector slumps to lowest level in ten months following Omicron impact

Service providers in the UK faced a tough December as the Covid-19 Omicron variant led to a sharp drop in spending on face-to-face consumer services due to commercial uncertainty and staff absences.

As a result, commercial activity at the end of 2021 was the weakest since the rebound in containment measures that began last spring.

It’s according to the latest UK PMI data which said the seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index fell sharply from 58.5 in November to 53.6 in December, marking the lowest since February.

The latest reading, however, was still comfortably above the neutral 50 line, which extended the current phase of production expansion to 10 months.

Employment and expectations

On a more positive note, the latest data showed that job creation has remained relatively strong, cost pressures have eased since peaking in November and production growth forecasts have improved slightly.

Where growth was reported, survey respondents commented on strong labor pipelines, helped by a sustained recovery across many sectors of the UK economy. But travel, leisure and hospitality companies cited a crushing drop in activity due to tighter pandemic restrictions and canceled events over the holiday season.

“Reflecting the trend in production volumes, the latest data signaled a severe loss of momentum for new orders in December. The rate of expansion was the slowest since the current phase of recovery began in March. Reports from survey respondents indicated that subdued consumer service demand and reluctance to spend by businesses in response to heightened pandemic uncertainty had negatively influenced sales volumes,” the report said. report.

“Additionally, export orders fell for the first time in six months and at the fastest pace since February, largely due to renewed travel restrictions,” he added.

He also noted that weaker demand conditions meant that pressures on business capacity were less pronounced than in November, signaled by the smallest increase in backlogs since March.

“Companies reporting an increase in unfinished business often linked it to staff absences and ongoing supply shortages,” the IHS survey said.

Cost charges

Rising prices for energy, fuel, transport and raw materials led to a further sharp increase in average costs in December.

“Service providers also widely commented on the increase in staff salaries in a highly competitive job market. Measured globally, the rate of input price inflation eased from November’s record level and was the slowest in three months. Similarly, average prices charged by businesses in the service sector rose rapidly in December, but the speed of inflation slowed for the first time since August,” the survey said.

In another breakdown of employment, the survey noted that strong job growth continued in the service economy at the end of 2021, despite the shortage of available candidates and some reports citing the need to reduce overhead. About 26% of the survey panel reported an increase in membership, compared to just 10% who reported a decline.

The strength of job creation also reflected optimistic expectations for business activity in the year ahead. The level of confidence increased slightly in December and was in line with that observed at the same time in 2020.

Business Outlook

Tim Moore, chief economics officer at IHS Markit, which compiles the survey, commented on the latest findings.

“Despite concerns about weakening economic growth heading into the new year, service providers expressed great confidence in the longer-term business outlook. About 55% of the survey panel forecast an increase in production over the whole of 2022, while only 10% expect a decline. The level of optimism has remained stable since the fall, suggesting that most companies foresee only a temporary impact on demand for the Omicron variant.

“The inflation outlook appeared to be improving, with input prices rising at the slowest pace in three months. Respondents again commented on the considerable pressure from energy, fuel and personnel costs. However, production cost inflation was only slightly down from November’s record high as many companies cited the need to pass on increased costs to customers during 2022,” Moore added. .

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, also commented on the latest data.

“The subtle easing of inflationary pressure to a three-month low was also welcomed by service providers who are struggling to hold on to margins, but prices charged remained close to the survey record.” With the Bank of England’s forecast for consumer price inflation expected to hit 6% in April, a 30-year high, prices charged to consumers by service providers may need to be contained to induce these customers to come back and the effects of the new IHU variant come over the horizon with more potential disruption,” he said.

The analysts’ point of view

Ulas Akincilar, head of trading at online trading provider INFINOX, said in a note sent to Capital.com that despite Omicron’s fears in the market, the UK’s dominant services sector has seen a rather wobble. than an annihilation in December.

“The pain has been focused on hospitality businesses, which have suffered greatly from Covid restrictions during what for many is the ‘make or break’ month of the year.

“However, with working from home now the norm for many service professionals, other companies have managed to continue largely as usual. It is a testament to the momentum of the sector that, even after such a dramatic downturn, it remains firmly in expansion territory.

“Production has now risen for 10 straight months and sentiment remains robust. Well over half of service companies expect things to improve in 2022, and only one in 10 expect a decline .

“There is also a hiring boom underway, but with many companies competing for staff, wage inflation is skyrocketing – and rising costs are squeezing margins,” he said. .

Akincilar also said that with rising numbers of Covid infections preventing people from working and consumer inflation still at an alarming level, the sector still faces big challenges. “But the way he took the Omicron hit in December in his stride is a huge reassurance to jittery markets,” he added.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, also shared her thoughts with Capital.com on the latest data.

“December’s Services PMI aligns with other timely indicators that suggest the emergence of the Omicron variant has weighed on consumer services spending over the past few weeks. Google Trends data shows that the number of people searching online for phrases such as ‘restaurant’, ‘pub’ or ‘gym’ has been very low over the past month.In addition, fewer people are travelling; journeys using the London Underground were almost half of their pre-Covid level in the seven days prior to the last data point, December 20.

“We continue to believe that GDP fell by around 0.6% month-on-month in December and another 0.3% in January. That said, we cannot rule out an increase in GDP in January whether consumers feel more confident to risk contracting Covid-19, now that Christmas is over and people know that Omicron is less likely to cause serious illness than Delta,” she said.

Read more: UK petrol retailers add to inflationary pressures

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