Press release

7 Apr 2021 London, GB

Purchasing managers report services activity improved to seven-month high in March – EY ITEM Club comments

The purchasing managers survey showed the services sector returned to clear growth in March, reaching a seven-month high of 56.3. This was revised down from a ‘flash’ reading of 56.8, but was up from 49.5 in February and an eight-month low of 39.5 in January.

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  • The purchasing managers survey showed the services sector returned to clear growth in March, reaching a seven-month high of 56.3. This was revised down from a ‘flash’ reading of 56.8, but was up from 49.5 in February and an eight-month low of 39.5 in January
  • Services activity was buoyed by preparations for the easing of restrictions from 12 April, including up the re-opening of non-essential retailers and of some outside hospitality and leisure activities. Forward bookings for consumer services played a significant role
  • Other elements of the survey were largely improved in March. New business rose for the first time in six months due to improved domestic demand while work backlogs increased. Employment increased at the fastest rate since June 2019. Optimism for the outlook over the next 12 month rose to the highest since December 2006
  • Service companies’ margins were squeezed as input prices rose at the fastest rate for nearly three years. This led to prices charged rising the most since November 2017
  • With the manufacturing sector expanding faster in March, the composite output index for manufacturing and services rose to 56.4 in March from 49.6 in February and an eight-month low of 41.2 in January
  • The survey fuels belief that, while the economy highly likely contracted in Q1 2021, the decline in GDP was probably significantly less than had originally been expected and that the economy has come off its January lows
  • The EY ITEM Club now suspects that the economy contracted by just over 1% quarter-on-quarter (q/q) in Q1, compared to the 3-4% q/q fall in GDP originally anticipated. The EY ITEM Club expects to raise its current 2021 GDP growth forecast of 5.0%
  • Consumers look well-placed to play a key role in the UK recovery given the recent high savings ratios, especially as it now looks likely that unemployment will rise much less than had been expected, helped by the extension of the furlough scheme
  • Additionally, after an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy; this should be supported by the tax incentive to invest in the Budget.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“Services activity picked up in March to grow at the fastest rate for seven months. Activity had previously almost stabilised in February after January saw the largest contraction in activity since last May. 

“Activity was buoyed in March by preparations for a significant re-opening of the economy from 12 April. The planned easing of restrictions will include the re-opening of non-essential retailers and of some outside hospitality and leisure activities. 

“Markit noted that rising levels of activity were linked to a recovery in business and consumer spending, while some parts of the service economy commented on a boost from higher residential property transactions during March. Markit also said that survey respondents often commented on pent-up demand and work on projects that had been delayed at an earlier stage of the pandemic.

“The services PMI rose substantially to 56.3 in March from 49.5 in February and an eight-month low of 39.5 in January. However, March’s PMI was revised down from the flash reading of 56.8.

“New business in the services sector picked up significantly in March as it grew for the first time in six months and at the fastest rate since last August. This was entirely due to improved domestic demand: foreign demand continued to contract as it was reportedly limited by international travel restrictions or issues with sales to EU customers. Notably, forward bookings for consumer services played a significant role.

“Backlogs of work across the service sector rose for the first time since September 2020, which is supportive for future activity. Meanwhile, employment rose for the first time since February 2020 and at the fastest rate since June 2019.

“Confidence increased to the highest level since December 2006 as the forthcoming easing of restrictions on activity reinforced optimism over the economic outlook. This has also been supported by the successful roll-out of the COVID-19 vaccines.

“Prices charged by services companies rose at the fastest rate for 33 months. This was the consequence of higher prices for a range of purchases, especially fuel, transportation and imported materials. Nevertheless, margins were still squeezed as input prices increased at a markedly higher rate than output prices.”

Composite March services and manufacturing output index points to strongest growth for six months       

Howard Archer continues: “The composite output index for manufacturing and services indicated that overall activity rose appreciably in March, having almost stabilised in February and after contracting at the fastest rate for eight months in January. March’s improved performance occurred despite lockdown measures largely continuing apart from the opening up of schools early on during the month.

“The composite output index improved substantially to a six-month high of 56.4 in March from 49.6 in February and an eight-month low of 41.2 in January. This took the composite output index well above the 50.0 level that indicates flat activity, although March’s index was revised down from the flash reading of 56.6.

“Nevertheless, the first quarter average for the composite output index was 49.1, pointing to slight contraction.”