UK services decelerated unexpectedly quickly in December although growth still remained comfortably above its long-run average. At 55.8, the headline PMI was down almost a full 3 points versus its November reading and at its weakest level in some nineteen months.
Nonetheless, new business volumes continued to expand at a healthy clip and reflected rising demand from both new and existing clients. Some intensification of capacity pressures was apparent in a twenty-first consecutive increase in backlogs and, despite further additions to headcount, insufficient staff numbers were reported as a factor restraining overall growth. Business expectations for the coming twelve months held up well.
Input costs were largely kept in check by reduced fuel bills and while some firms sought to raise output charges, the rate of inflation here was still only modest as competitive pressures continued to have a significant impact.
The deceleration in economic activity implied in today's survey is consistent with the findings of both the December manufacturing and construction sector PMIs. Indeed, the overall composite output index dropped more than 2 points versus November to 55.4, its lowest value since May 2013. Even so, current readings are still in line with fourth quarter real GDP growth of around the 0.5 percent mark, an outcome that would be more than welcome in most of Continental Europe.
Still, should the economy continue to cool over the first half of 2015, it may be that gradually building upside pressure on wages will subside in which case the BoE MPC is likely to feel that much more comfortable with leaving Bank Rate at its current 0.5 percent.
The Markit/CIPS UK Services PMI covers transport & communication, financial intermediation, business services, personal services, computing & IT and hotels & restaurants.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM non-manufacturing index in the U.S. and the Markit Services PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI services data give a detailed look at the services sector, how busy it is and where things are headed. The indexes are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.
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