The UK’s dominant services sector is on the up – are better economic times ahead?

The UK economy has spent a long time in the doldrums but could it be that better times are ahead?

The CIPS UK Services Purchase Managers’ Index, which monitors the dominant part of the UK economy – service industries – leapt to 55.9 in April from 52.9 in March, representing the fastest rise in activity for a year. That figure is well above the 50, the mark that separates a growing sector from a contracting one.

S&P Global, which conducts the survey, found “buoyant demand for services”, which boosted “new orders and activity growth”. Hooray! Survey respondents, said the firm, often noted that stronger consumer spending was a factor boosting business activity during April. And there was more: “Resilient demand and rising optimism regarding the business outlook also resulted in a solid increase in employment numbers.”

On the same day, the Bank of England’s credit report found UK consumers increased their spending on credit cards during the previous month (March), while also running down their savings at banks and building societies.

The glass half-empty take is that increasing numbers of people are borrowing to pay for essentials. The glass half-full alternative is that they’re feeling a bit more chipper and inclined to use some of the money saved up during the Covid-19 pandemic.

There is probably a bit of both at work here, with wealthier consumers prepared to splash some of the cash they have saved during the pandemic, while those struggling with higher prices and inflation turn to credit cards.

The CIPS survey pointed to boosts for the travel, tourism and leisure sub-sectors, which is suggestive of improved consumer confidence and a willingness to spend among those with the capacity to do so.

The results from the Office for National Statistics (ONS) business conditions survey were rather less positive. The ONS said the situation for businesses “continues to remain challenging” but also found “small signs of positive improvement for some measures”. Examples included a stable proportion of firms reporting they were able to get materials, goods and services from within the UK, and fewer concerns about business overall.

A notable feature of both this and the CIPS survey was the prevalence of inflation. Very much the UK economy’s problem child. S&P Global found a combination of “demand resilience” and “greater wage costs” inevitably adding to inflationary pressures on the services sector.

The ONS reported that almost a third of the businesses it surveyed were experiencing worker shortages. Wages were being hiked by a significant number of firms, which is one way of bringing new workers into the fold.

Service sector inflation has been a feature of the ONS’s recent inflation updates, something that has been playing on the minds of the members of the Bank of England’s Monetary Policy Committee (MPC).

If the CIPS survey is right, and the UK’s dominant sector is picking up speed and finding momentum, MPC members may be inclined to think the economy is able to cope with another interest rate rise or two. And that may be needed.

The US Federal Reserve has signalled a potential pause in its rate-rising activities, but it has nonetheless increased its benchmark rate for the tenth occasion since March 2022 – this time by a quarter percentage point. But US inflation is roughly half that in the UK, and its rates are higher than Britain’s 4.25 per cent. The European Central Bank, meanwhile, has imposed a compromise 0.25 per cent rise. Inflation across the bloc is running at 7 per cent, again much lower than in the UK.

Central banks often move in packs, and the chances of the Bank of England going with the crowd have now moved into “racing certainty” territory. While the Fed may indeed stand pat next time, especially in light of the travails of America’s banking sector, I’m not at all sure that the Bank’s MPC will be able to do the same thing. It has been able to guide down the City’s forecast of peak UK interest rates to 4.5 per cent. I suspect that it will turn out to be higher.