Brexit-inspired inflation applies brake to services sector growth in November
The purchasing managers’ index for services dropped to a balance of 53.8 in November, down from 55.6 in October. However, the sector is still growing: any reading above 50 indicates expansion, while anything below represents contraction. The sector has remained above the 50 watershed for 16 consecutive months.
The services sector makes up 80 per cent of economic output in Britain and covers everything from restaurants, hotels and hairdressers to finance and banking. The monthly PMI surveys cover about 400 companies and topics such as business activity, new business, prices charged, input prices, employment and expectations for activity. Weak expansion in the sector has a big impact on overall economic growth.
Uncertainty about the economic outlook, linked with Brexit worries, “continued to permeate the business mood” last month, while stretched budgets among customers was acting as a brake on growth, the research found.
The survey had little impact on the value of the pound, as markets focused on Brexit developments. Sterling fell by 0.3 per cent against the US dollar to $1.3451. Against the euro, sterling rebounded from a six-day low to trade flat on the day at €1.1380.
The survey showed that while companies were still reporting a solid upturn in new work, the rate of new business growth had eased since October to weaker than the average so far this year.
A jump in inflation since the Brexit vote has dampened consumer spending, which is affecting the services sector. People are spending more on basics and are paring back discretionary spending. A survey published yesterday by the British Retail Consortium and KPMG found that last month shoppers spent an increasing share of their budgets on the rising cost of food.
The headline rate of inflation was at a five-year high of 3 per cent in October. The Bank of England thinks that it will peak at about 3.2 per cent before the end of the year, then start to fall again.
The PMI survey also showed a jump in the prices being charged by companies. Prices rose at their fastest rate since February 2008 and were at their second highest since the survey began in 1996.
Companies said they were having to battle higher expenses for energy, food, fuel, imported items and staff salaries. The fall in sterling since the Brexit vote has pushed up the price of imports, while the rise in the national living wage to £7.50 since April has affected the margins of smaller companies.
Chris Williamson, chief business economist at IHS Markit, which compiled the survey, said that price increases suggested that inflation would rise further.
“Rising oil prices were again to blame in November, with firms also reporting the need to pass higher costs of a wide variety of other inputs on to customers. As such, the survey data suggest that inflationary pressures have yet to peak,” he said. The survey was lower than economists had expected, but came after strong gains in the manufacturing and construction sectors.
• Businesses in the 19-nation eurozone had a bumper November, according to a key survey (Tom Knowles writes). The composite purchasing managers’ index for the eurozone, which includes responses from both the manufacturing and services sectors, rose to 57.5 from 56 in October, the highest level since April 2011. A reading above 50 indicates growth. Growth was led by manufacturing, where production rose at its fastest pace in almost seven years in November.
Chris Williamson, chief economist at IHS Markit, which compiles the survey, said that the PMI surveys for the past two months suggested that the eurozone economy would expand by 0.8 per cent in the final quarter of the year.