Service sector growth slows as business confidence takes a hit

Confidence among bosses in the UK services sector has sunk to its lowest level in 18 months as higher prices slowed a recovery in the industry, according to new data.

The fall in confidence was due to rising costs for products and services in the sector that includes retail, hospitality and leisure services, along with customers tightening their belts, the S&P Global/CIPS business activity index said.

The report recorded a Purchasing Managers’ Index (PMI) score of 58.9 for the sector in April, with anything above 50 seen as a sector in growth.

But the growth was far slower than March, when the score was 62.6.

Bosses reported that inflation was hitting companies hard, including rising energy costs, fuel and wages – with many of these costs being passed on to customers.

The survey found the higher cost of doing business and the war in Ukraine was limiting the pace of expansion last month.

There was some evidence that companies continued to benefit from the lifting of Covid-19 restrictions, especially with international travel returning.

Employment levels also continued to rise, marking a 14-month unbeaten run for jobs growth in the sector.

Andrew Harker, economics director at S&P Global, which compiles the survey, said: “The twin headwinds of the cost-of-living crisis and the war in Ukraine started to bite on the UK service sector during April, as evidenced by a sharp slowdown in new order growth to the lowest in the year so far.

“Worryingly, companies seem to be expecting impacts to be prolonged, with business confidence dropping to the lowest in a year-and-a-half.

“Indeed, cost pressures show little sign of abating, with inflation even accelerating in April to the strongest in almost 26 years of data collection.

“The feeding through of these cost pressures to charges for customers means that the spell of rapid inflation clearly has further to run.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), said: “Though the headline index remained in growth territory, the services sector is showing signs of going off the boil as the drip-drip effects of the highest prices for 26 years impacted on orders and business mood.

“New contract wins rose at the slowest pace so far this year as fears about the economy started to paralyse customer confidence, and service providers reported the lowest optimism since 2020 at the height of the pandemic.

“The invasion of Ukraine exacerbated the problem of disruption and cost increases, with driver shortages, clean access to borders and higher wages and energy hikes adding to these obstacles.

“Businesses were forced to pass on costs to consumers at a similar rate, potentially reducing the pool of demand for hospitality and services in the coming months.”