UK service sector growth hits 8-month high as Omicron wave fades

LaToya Harding
·Business Reporter, Yahoo Finance UK
·3 min read
UK service sector: Rates of expansion in both business activity and new orders accelerated sharply during the month, supporting stronger job creation.
UK service sector: Rates of expansion in both 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 a 8-month high in February amid increased activity and new orders as the Omicron wave faded.

According to IHS Markit’s PMI business activity index, the reading soared to 60.5 in February, up from 54.1 the previous month, signalling a steep rise in output. It was the fastest increase since June 2021.

Any reading above 50 indicates growth.

Rates of expansion in both business activity and new orders accelerated sharply during the month, supporting stronger job creation.

Respondents said that market demand and client confidence improved alongside the reduction in pandemic-related disruption, thereby supporting growth of activity.

February's reading soared to 60.5 in February, up from 54.1 the previous month, signalling a steep rise in output. Chart: IHS Markit, CIPS
February's reading soared to 60.5 in February, up from 54.1 the previous month, signalling a steep rise in output. Chart: IHS Markit, CIPS

Similarly, new business increased at a much faster pace amid an easing of pandemic restrictions, and one that was the most marked in eight months.

There were widespread reports of improved demand in the US, while higher new orders from European clients were also seen.

However, inflationary pressures also intensified during the month. A range of inputs were up in cost, with salaries, fuel and utilities most widely mentioned. Food and other material costs were also reportedly higher amid supply shortages.

The passing on of higher prices to customers led to the sharpest pace of charge inflation on record, the new data showed.

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Rising workloads and the prospect of further growth in the months ahead led service providers to expand their staffing levels, extending the current sequence of job creation to a year. The latest rise in employment was the fastest since October last year.

Although jobs growth was strong in February, IHS said there were still reports of difficulties securing staff. In addition to this, businesses were faced with shortages and an accumulation of outstanding business.

“This pass-through of costs to customers will very likely prompt the Bank of England (BoE) to hike interest rates again at the next monetary policy committee (MPC) meeting in March,” Andrew Harker, economics director at IHS Markit, said.

"Although the latest set of PMI data were encouraging, the inflationary picture still has the potential to limit growth, while it remains to be seen what impact the Russian invasion of Ukraine will have on the service sector and wider economy.

“As such, there are still downside risks even as disruption from the pandemic finally appears to be fading."

Read more: How Russia's war on Ukraine is impacting stock prices

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, added: “With the evolving geopolitical situation, companies may struggle to keep on top of this current momentum.

“If sourcing becomes disrupted and prices rise again to add to this month’s near-record inflation, businesses may be back to square one and unable to pass on their higher costs to consumers who faced the strongest rise in prices in a generation this month."

Watch: How does inflation affect interest rates?