UK businesses raise prices to pass on higher wage costs: PMI
BRITAIN’S services sector kicked off the second quarter with its fastest growth in a year, boosted by new orders, but it passed the cost of rising wage bills on to consumers, adding pressure on the Bank of England (BOE) to keep raising interest rates.
The final S&P Global-CIPS UK services purchasing managers’ index (PMI) rose to 55.9 from 52.9 in March, above the 50 threshold for growth and higher than a provisional reading of 54.9.
The reading added to a series of improved measures of the economy, which had appeared to be heading for a recession in early 2023. Official mortgage and consumer lending data also surprised to the upside on Thursday (May 4).
“A strong rate of service sector growth meant that the UK economy started the second quarter of 2023 in positive fashion,” said Tim Moore, economics director at S&P Global Market Intelligence.
However, prices charged by businesses picked up pace after rising by the smallest amount in 22 months in March, and are still increasing noticeably faster than before the Covid-19 pandemic as firms rebuild profit margins.
A BOE survey of companies on Thursday showed that expectations for selling prices refused to budge lower in April, although their predictions for wage growth and inflation in the coming year cooled.
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The central bank, which is expected to lift its bank rate to 4.5 per cent next week, is closely monitoring wage-setting and businesses’ profit margins, as it attempts to return double-digit inflation to its 2 per cent target.
“The combination of a stronger demand outlook and sticky core inflation are likely to meet the (BOE’s) criteria for a rate hike, despite easing in energy prices, input costs, and supply chains,” said Andrew Goodwin, chief UK economist at consultancy Oxford Economics.
Nearly half of the PMI respondents reported a rise in costs, mostly due to strong wage growth and high energy bills.
Official data showed average private-sector wages in the three months to February were 6.1 per cent higher than a year earlier, while consumer price inflation in March was 10.1 per cent.
S&P Global said new services orders grew at the strongest pace since March 2022, just after Russia’s invasion of Ukraine, helped by improving domestic demand and overseas sales as well as more foreign tourists.
Eurozone services PMI data for April was also robust. Growth in eurozone business activity sped up last month, though less than initially indicated, with robust services more than offsetting a downturn in manufacturing.
HCOB’s composite PMI, seen as a good gauge of overall economic health, climbed to an 11-month high of 54.1, below a preliminary reading of 54.4 but up from 53.7 in March. April was the survey’s fourth straight month above the 50-mark.
The PMI covering the bloc’s dominant services industry hit a one-year high of 56.2, up from March’s 55, but again lower than the 56.6 flash estimate.
“The services sector is in robust shape across the eurozone… Italy and Spain are currently the main driving forces,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
Although the eurozone’s order backlog grew at a weaker pace, across all HCOB PMI indicators, “everything suggests that growth in the eurozone services sector will continue in the months ahead,” he added.
Back in the British PMI, employment rose for the fourth month in a row, and improved staff availability helped firms fill vacancies. Business optimism for the year ahead was the strongest in 13 months, with 52 per cent of firms expecting activity to grow. REUTERS
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