Services sector growth slows but outlook remains upbeat

The services sector grew in March at a more muted pace than the first two months of the year, new data shows, but expectations for the sector remain positive.

The headline Investec Services Purchasing Managers Index reached 59.1 last month, down from February's 60.6 reading. However, services firms continued to show positive growth, with new business broadly rising and new export business continuing the trend of expansion into a fourth month.

“Within that we note that the UK was mentioned as a particular area of strength during the month,” said Investec’s Philip O’Sullivan.

Business Outstanding continued to rise last month as client demand remained strong, extending the trend to 46 months.

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“However, the rate of increase slowed to a six-month low, which likely explains the moderation in employment creation to its slowest pace since November,” Mr O’Sullivan said.

Higher staff costs and energy prices pushed input prices higher for firms during the month, with a rise in output prices offsetting that somewhat. The survey showed the rate of improvement in the profitability index quickened during March.

Growth in activity

Expectations dipped to a four-month low, but services firms remained upbeat about prospects. Thirteen times as many companies were expecting to see growth in activity over the coming year compared with those who anticipate a decrease.

Meanwhile euro zone businesses enjoyed their best quarter in six years at the start of 2017, and although growth was not quite as fast as a flash estimate, the upturn was broad-based, a separate PMI suggested. Soaring demand allowed firms to raise prices at the fastest rate since mid-2011, and survey compiler HIS Markit said the data pointed to first-quarter economic growth of 0.6 per cent, faster than the 0.5 per cent predicted in a Reuters poll last month.

Buoyancy was also evident in the UK data, with the services sector growing faster than expected in March as companies raised their prices at the quickest pace in 8½ years. The better-than-forecast momentum in IHS Markit’s monthly Purchasing Managers’ Index was accompanied by stronger growth in new business, though hiring slowed. – Additional reporting, Reuters/Bloomberg