Business development · 3 November 2016

New business creation drives growth for “dominant” UK services sector

services sector
Inflation on the costs of materials in October ran at the highest level since March 2011

Growth in the UK services sector has “moved up a gear”, as new analysis showed business performance for October 2016 at its strongest rate since January.

The purchasing managers’ index (PMI), calculated by business analysts IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) industry body, demonstrates the performance of the services sector through a scale-reading of zero to 100. A figure of 50 represents growth on the previous month.

The services sector encompasses a range of industries from banks and shops to hotels, and is worth three quarters of the UK’s GDP.

The “headline” number of the PMI – indicating the overall health of the sector –  rose to 54.5 in October, up from 52.6 in September, as business activity increased.

The analysts credited the growth in service sector trade in the final quarter of 2016 to “stronger expansion of incoming new businesses”.

Data also revealed a growing workforce across the sector, as employment levels for businesses in the sector rose for the third month running.

Alongside the rise in new firms, growth was attributed to a rise in international demand for British products and services, following a decline in the value of the pound.

However, the exporting gains were undermined by rising domestic prices, offset by inflationary pressures as a result of the falling worth of sterling.

IHS Markit reported that inflation on the domestic costs of materials in October ran at the highest level since March 2011, driving up expenses for businesses in the services sector.

Commenting on the latest figures, chief business economist at IHS Markit, Chris Williamson, warned that despite an “encouraging picture of the economy”, a rise in the prices of products and materials threatened positive growth for the sector.

He said: “Costs are consequently rising at the fastest rate for over five years. If sustained, the increase in prices threatens to curb both corporate hiring and consumer spending, as firms seek to reduce staff costs and households see their pay eroded by rising inflation.”

In a statement, David Noble, group CEO at the Chartered Institute of Procurement and Supply, suggested that concerns over Brexit had begun to “dissipate” in the services sector.

He added that firms in the services sector had “refocused on opportunities and ramped up marketing and sales promotions”.

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Simon Caldwell is deputy editor at Business Advice. He has a BA in politics and communications from the University of Liverpool, and has previously worked as a content editor in local government and the ecommerce industry.