- The purchasing managers survey indicates that the services sector improved significantly in April as it benefitted from the easing of restrictions. The services PMI reached a 90-month high of 61.0 after rising to 56.3 in March from 49.5 in February and an eight-month low of 39.5 in January
- Activity was led by a pick-up in consumer services, but there was also improvement in business services
- Other elements of the survey were largely improved in April, boding well for future services activity. New business rose the most since December 2013 and backlogs of work increased the most for six years. Employment increased at the fastest rate since October 2015. Optimism for the outlook over the next 12 months was at the second highest level since December 2006
- One concern for services companies was that input prices rose at the fastest rate for four years. This led to prices charged rising the second most since November 2017. Nevertheless, services companies’ margins were squeezed
- While the PMI can overstate developments in the economy at times of change, both the services and manufacturing April surveys look encouraging for Q2 growth prospects
- The Government’s roadmap out of lockdown seems to have lifted business and consumer confidence. The economic boost has likely been reinforced by the near-term supportive measures contained in March’s Budget
- With Q1 likely having seen a slower contraction than had originally been anticipated, and with the economy looking to be on the front foot at the start of Q2, the EY ITEM Club has substantially raised its 2021 GDP growth forecast to 6.8%. The economy is expected to benefit progressively from Q2 as restrictions on activity are eased, supported by the roll-out of COVID-19 vaccines
- Consumers look well-placed to play a leading 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. After an extended period of weakness, business investment is expected to gain momentum over 2021 as companies grow more confident in the economy and their own prospects; 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 markedly in April to grow at the fastest rate for 90 months as the sector benefitted from the easing of COVID-19 restrictions on the 12th. This increase reflected both improved consumer and business spending.
“The services PMI rose reached 61.0 in April – revised up from the ‘flash’ reading of 60.1 – after rising to 56.3 in March from 49.5 in February and an eight-month low of 39.5 in January.
“New business in the services sector grew for a second successive month in April and at the fastest rate since December 2013, boosted by forward bookings and new project starts. Domestic demand drove the improvement but there was some pick up in foreign orders too.
Meanwhile, backlogs of work rose at the fastest rate for six years and employment rose at the fastest rate since October 2015.
“Confidence was at the second highest level after March since December 2006 as the easing of government restrictions on activity reinforced optimism over the economic outlook amid the successful rolling out of the COVID-19 vaccines.
“Prices charged by services companies rose at the second fastest rate for 40 months after March. This was the consequence of input prices rising at the fastest rate for just over four years due to transport surcharges, staff wages, and the pass-through of higher imported raw material costs by suppliers. Nevertheless, margins were still squeezed as input prices increased at a markedly higher rate than output prices.”
Composite April services and manufacturing output index points to strongest growth for 90 months
Howard Archer continues: “The purchasing managers’ survey for the UK manufacturing and services sectors indicated that overall activity rose appreciably in April.
“The composite output index for manufacturing and services improved to a 90-month high of 60.7 in April – revised from the ‘flash’ reading of 60.0 – from 56.4 in March, 49.6 in February and an eight-month low of 41.2 in January. This took the composite output index substantially above the 50.0 level that indicates flat activity and bodes well for second quarter GDP growth even allowing for the fact that the purchasing managers’ surveys can overstate developments in the economy at times of appreciable change.”