In marked contrast to the slowdown already seen in both manufacturing and construction, growth in UK services surprisingly accelerated in April. The headline PMI rose 0.6 points to 59.5, an 8-month high.
The apparent pick-up in activity was driven by faster growth of new orders which advanced for a twenty-eighth consecutive month. Backlogs also increased for the twenty-fifth month in a row (a survey record) and there was a further marked rise in employment. Against this backdrop, service providers remained very confident about the year-ahead outlook despite a slight dip in optimism linked to uncertainty surrounding tomorrow's general election.
April saw another solid increase in input costs, largely attributable to stronger wage gains. That said, inflation at this level was still weaker than its long-run average. Moreover, service provider charges fell for the first time since last October and at the fastest rate in over three years.
April's composite output index weighed in at a very healthy 58.1 which should be consistent with real GDP growth of around 0.8 percent. Services are clearly outperforming the other major sectors, notably manufacturing (PMI 51.9) and a more balanced expansion would boost the chances of a durable economic recovery. However, despite further signs of a pick-up in wages, market conditions apparently remain too competitive to accommodate any meaningful rise in output prices.
As such, today's data should leave the majority of BoE MPC members quietly confident that the current policy stance is appropriate. Note that the extent to which today's figures have been affected by tomorrow's election may not be apparent for some time should the result be as close as the opinion polls predict.
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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