Service sector still in retreat despite modest rebound

● Lion’s share of UK economy remains well within contraction territory – PMI

Activity in Britain’s all-important services sector contracted at a slower pace in May, but remained under severe pressure despite some lockdown restrictions easing, according to a key report.

The closely-watched IHS Markit/cips services purchasing managers’ index (PMI) rose to 29 last month from an all-time low of 13.4 in April, but the rate of decline in output was still the fastest since records began in 1996.

A score above 50 means the sector – the biggest in the economy – is growing, but anything below 50 means it is shrinking.

The reading was slightly better than feared, and better than the earlier so-called flash PMI estimate, but gives an all-sector composite reading of 30, signalling another cliff-edge plunge in the wider economy last month.

The report said that while the gradual reopening of some sectors, in particular construction, helped boost client demand, many firms have had to remain shut amid the lockdown and consumer-facing businesses are among the hardest hit.

Experts said the latest reading for the economy cemented expectations for more economy-boosting action from the Bank of England at its 18 June meeting, with another dose of quantitative easing thought to be on the way.

But speculation continues to swirl over whether policymakers will slash interest rates into negative territory, after governor Andrew Bailey recently confirmed it is under active consideration.

Tim Moore, economics director at survey compiler IHS Markit, said: “The Covid-19 pandemic continued to have a severe impact on UK service sector activity in May, despite a boost in some areas from the gradual easing of lockdown measures.”

Business expectations improved slightly again since the low point in March, as some hoped for a fillip from easing restrictions.

“However, customer-facing businesses continue to report extreme levels of concern about their near-term prospects, with efforts to adapt to social distancing measures set to hold back capacity and generate a sharp increase in costs,” Moore noted.

The report showed that just over half of services firms surveyed – 54 per cent – reported a drop in business activity during May, while only 13 per cent signalled an increase.

There was another sharp drop in new services work, albeit at a slower pace, due to cancelled projects, customer closures and shuttered sales operations.

New export work also fell sharply, while employment dropped at the second steepest rate since the survey began in July 1996.

Many restaurants and retailers have announced job losses, despite the UK government’s worker furlough scheme, due to end in October.

But some services firms reported a tentative revival in business conditions following the initial shock of the lockdown period, according to the survey.