PMI Data Confirms Ongoing Expansion In Sector

SMEs in the service sector have continued reason to be upbeat after the latest data confirmed the sector is performing at its best level for ten months.

The Purchasing Managers Index (PMI) published by Markit and the Chartered Institute of Purchasing and Supply (CIPS) gave a reading of 60.5 in August, up from July's 59.1 and the highest growth rate seen so far this year.

With any reading over 50 indicating expansion, it also meant there have now been 20 successive months of growth. During this time staffing levels have also increased in every month, although August's figure was the lowest since March 2014.

New orders were the biggest contributor to the strong increase in output, with the levels of client confidence noted by the survey to be high. However, by contrast the levels of business confidence, while still very high, were at their lowest for 15 months amid concerns over the "underlying strength of their business pipelines". Another problem was that of skill shortages in certain areas of the economy.

Chief economist at Markit Chris Williamson suggested the data from this week's PMIs showed the economy to be in rude health overall.

He remarked: "An acceleration of growth in the vast services sector and an ongoing construction boom offset a weakened performance in manufacturing in August.

"The three PMI surveys indicate that the economy grew at the fastest rate since last November, providing further ammunition for policymakers arguing for higher interest rates."

However, he added, while the UK appears set to enjoy third-quarter expansion of around 0.8 per cent, there is a danger that growth is "too dependent on the domestic economy", with exports to Europe being affected by issues such as the Ukraine crisis. Mr Williamson said this may make some members of the Bank of England's Monetary Policy Committee resist calls for an interest rate rise.

Taking a similar view, CIPS chief executive David Noble warned that growth in the sector may be close to its peak and is likely to tail off in the months ahead.

Expert Opinion

The strong performance from the service sector will be welcomed by businesses across the industry, with this research being the latest in a series of studies to highlight that a number of specific sectors are in a good position following the economic problems seen across the past several years. <br/> <br/>"Small businesses will be heartened in particular by these figures, although seeing business confidence in the sector fall to a 15 month low is a notable development. It will be interesting to see SMEs react to both this and perceived skills shortages over the coming months. <br/> <br/>"We would urge SMEs with any concerns to ensure they discuss any concerns with advisors including lawyers, to ensure they have a robust framework in place to ensure growth across the coming months." Steven Beahan - Partner