–One-Off Temporary Factors Seen Hurting Services Sector In April
–Impact Ash Cloud, Election Uncertainty, Easter Timing Cited As Factors
–But Analyst Urges Caution On Read Across To Real Economy
–Composite PMIs Show Slight Weakening In Activity From March

LONDON (MNI) – Activity growth in the UK’s service sector slowed
unexpectedly in April, hit by uncertainty over the election outcome and
the volcanic ash cloud, according to the latest data from Markit/CIPS.

Markit/CIPS services headline PMI came in at 55.3 against 56.5 in
March and a Market News median forecast of 57.0.

CIPS said that “a number of temporary factors undermined increases
in activity and new business. Positive sentiment also fell, but
companies felt confident enough to add to their payrolls for a second
successive month”.

The survey showed persisting cost pressures but an inability among
companies to pass these on given strong competitive pressures.

“On the prices front, cost pressures continued to intensify but
strong competition again hampered companies’ ability to raise their own
charges”.

Paul Smith, Senior Economist at Markit said:

“The service sector continued to expand at a healthy pace in
April, especially business services. An easing in the rate of expansion
compared to March will raise some concerns about the durability of the
upturn, but survey respondents commonly reported that the volcanic ash
cloud, the timing of Easter and the general election were the cause of
slower growth. The effect of the volcano alone was estimated to have
taken around 0.9pts off the unadjusted headline index”.

“This suggests that the underlying trend in services growth remains
solid and, alongside the buoyant manufacturing and construction PMI
data, indicates that private sector output retained strong momentum at
the start of Q2, with quarterly GDP growth of approximately 0.4%-0.5%”.

“Moreover, positive developments were again seen in the labour
market, with service providers adding jobs for a second successive
month. This provides some reassurance that companies have confidence in
the economic recovery.”

The Employment Index was the strongest since March 2008.

Commenting on the report, David Noble, Chief Executive Officer at
the Chartered Institute of Purchasing & Supply, indicated that the
special factors impacting on this survey were likely to prove as
temporary as the cold weather effect seen in January. But he said
inflation was ‘lurking’ in the services sector:

“One note of caution must be the inflation that seems to be lurking
within the services sector. Input costs continue to rise for services
businesses but intense competition for customers means they are still
unable to pass these costs on. This situation cannot last forever and we
will soon reach a tipping point where profit margins can no longer be
squeezed and output prices have to rise”.

Chris Scicluna, deputy head of economic research at Daiwa, urges
caution over the PMIs, saying since the recession they have been a poor
predictor of the real economy. The services PMI has been above the 50
contraction/expansion level for more than a year now, a story not
reflected in the official output data.

Putting the Apil PMIs together does show a slight weakening in UK
activity compared to March.

The unadjusted composite PMI for April was 56.9, down from 57.7 in
March for combined maufacturing and services while the combined
manufacturing/services output and new orders index fell to 53.9 from
54.2 in March.

–London newsroom: 4420 7634 1624; email: ukeditorial@marketnews.com

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