Positive PMI services figures indicate 'underlying strength' in the sector – ITEM Club

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s PMI services figures:

  • Some slowdown in the services PMI, following March's high, was to be expected
  • But the release contains plenty of evidence of underlying strength in the services sector
  • These figures bode well for growth in Q2, but the wide divergence between survey and official data in Q1 makes it difficult to make an accurate judgement

“Some slowdown in the services PMI following March's high was to be expected. But it is encouraging that the index remained well above the 50.0 mark, which separates expansion from contraction in April, for the sixteenth successive month.
 
“Today’s figures indicated underlying strength in the services sector. In particular the volume of new business increased at a healthy pace, which indicates that we may see a further expansion of output in the months ahead. On the downside however, the increase in input costs wasn't reflected in output charges, suggesting immense competitive pressure. This could prove to be a roadblock in the coming months, as margins can only be squeezed so much, before companies are forced to increase prices.
 
“The wide divergence in business surveys and official data in Q1 makes it difficult to judge how this result will impact GDP in Q2. But on the face of it, these figures bode well for overall growth. With the extra Bank holiday in June likely to weigh down on the economy, it is important that output in the rest of the quarter remains robust.”