Service sector

UK service sector collapses to ten-month low following Omicron impact

Service providers in the UK had a difficult December as the Covid-19 variant Omicron saw spending on face-to-face consumer services sharply lower due to business uncertainty and staff absences.

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

This is according to the latest UK PMI data which indicated that the seasonally adjusted IHS Markit / CIPS UK Services PMI® business activity index was down 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 threshold, extending the current phase of production expansion to 10 months.

Jobs and expectations

On a brighter note, the latest data showed job creation remained relatively strong, cost pressures have eased from the peak in November, and output growth expectations have improved slightly.

Where growth was reported, survey respondents commented on strong work reserves, aided by a sustained recovery in many sectors of the UK economy. But travel, entertainment and hospitality companies have cited an overwhelming decline in activity due to tighter pandemic restrictions and canceled events during the holiday season.

“Reflecting the trend in production volumes, the latest data signaled a serious loss of momentum for new orders in December. The rate of expansion has been the slowest since the current phase of recovery began in March. Reports from survey respondents indicated that weak demand for consumer services and companies’ reluctance to spend in response to increased pandemic uncertainty had negatively influenced sales volumes, ”the report said.

“In addition, export orders fell for the first time in six months and at the highest rate since February, largely due to new travel restrictions,” he added.

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

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

Financial expenses

Rising prices for energy, fuels, transport and raw materials led to a further sharp increase in average cost charges in December.

“Service providers have also widely commented on the increase in staff salaries in a very competitive labor market environment. Measured overall, the rate of input price inflation slowed from November’s record high and was the lowest in three months. Likewise, the average prices charged by companies in the service sector rose rapidly in December, but the rate of inflation slowed for the first time since August, ”the survey said.

In another employment breakdown, the survey noted that strong employment growth had been maintained in the service economy through the end of 2021, despite the shortage of available candidates and some reports citing the need to reduce overheads. About 26% of the survey panel reported an increase in membership, compared with just 10% who reported a decrease.

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

Commercial outlook

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

“Despite fears that economic growth may weaken as the new year approaches, service providers have expressed strong confidence in the long-term business outlook. About 55% of the survey panel anticipate an increase in production during the whole of 2022, while only 10% expect a decline. The degree of optimism has remained stable since the fall, suggesting that most companies only anticipate a temporary blow to demand for the Omicron variant.

“The outlook for inflation appeared to be improving as input prices rose at the slowest pace in three months. Survey respondents again commented on the considerable pressure exerted by energy, fuel and personnel costs. Inflation in production costs has slowed only slightly from November’s record, however, as many companies raised the need to pass escalating costs on to customers during 2022, ”added Moore.

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 struggling to maintain their margins, but prices charged remained close to the survey record. With the Bank of England’s consumer price inflation forecast set to hit 6% in April, a 30-year high, prices charged to consumers by service providers may need to be checked in an attempt to get back to those levels. customers and the effects of the new IHU variant come on the horizon with more potential disruption, ”he said.

Analyst point of view

Ulas Akincilar, head of commerce at e-commerce provider INFINOX, said in a note to that despite Omicron’s fears of the market, the UK’s dominant services sector has seen a downturn. oscillation rather than erasure in December.

“The pain was focused on the hotel companies, which suffered greatly from the Covid restrictions during what for many is the ‘make or break’ month of the year.

“However, with working from home now common practice 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 increased for 10 consecutive months and sentiment remains strong. More than half of service companies expect things to get better in 2022, and only one in 10 expect it to be down.

“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 the growing number of Covid infections preventing people from working and still alarming consumer inflation, the industry still faces great challenges ahead. “But the way he took the December Omicron hit in his stride gives tremendous reassurance to nervous markets,” he added.

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

“The December services PMI is consistent with other timely indicators that suggest the emergence of the Omicron variant has weighed on consumer services spending in recent weeks. Data from Google Trends shows that the number of people searching online for phrases like “restaurant”, “pub” or “gym” has been very low over the past month. In addition, fewer people travel; trips using the London Underground were almost half of their pre-Covid level in the seven days until the last data point on December 20.

“We continue to think GDP fell about 0.6% month over month in December, and a further 0.3% in January. That said, we can’t rule out a GDP increase in January if consumers feel more confident about risking Covid-19, now that Christmas is on the sidelines and people know Omicron is less likely to be. lead to serious illness than Delta, “she said.

Read more: UK gasoline retailers escalate inflationary pressures

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