The UK service sector rebounded in December as business optimism jumped in the wake of Boris Johnson’s unexpectedly decisive election victory, lifting some of the political uncertainty facing the British economy.
The latest health check of a sector that includes hotels, restaurants, transport and the City from IHS Markit and the Chartered Institute of Procurement and Supply (Cips) found that business optimism soared to the highest level since September 2018.
Companies reported the sharpest rise in new work since July amid signs that service providers have become hopeful that a more stable political backdrop should help business in 2020.
The monthly purchasing managers’ index from IHS Markit/Cips rose to 50.0 last month, up from 49.3 during November, to signal a stabilisation of overall service sector activity on a scale where 50.0 separates growth from contraction.
The survey of about 650 service sector companies straddled the election, with firms responding between 5 December and 19 December, suggesting the unexpectedly decisive result may have influenced business optimism.
The Institute of Directors, which polled almost 1,000 of its members the day after the election, found optimism among company bosses leapt to its highest level for more than three years following the Conservatives’ election win.
Tim Moore, the economics associate director at IHS Markit, said: “The modest rebound in new work provides another signal that business conditions should begin to improve in the coming months, helped by a boost to business sentiment from greater Brexit clarity and a more predictable political landscape.”
Despite the improving outlook, the snapshot for December from service sector firms, manufacturers and the construction industry together signalled an overall stagnation in the UK economy at the end of 2019.
IHS Markit and Cips said those reporting a drop in activity generally cited delayed spending decisions ahead of the general election. However, export orders dropped amid Brexit concerns, with European customers in particular less willing to place orders with UK firms.
Duncan Brock, group director at Cips, said rising fuel and salary costs could dampen service sector companies’ hopes of greater profitability in the coming months.
The government announced an above-inflation increase in the “national living wage” paid to workers over the age of 25, which business leaders said could make it harder for them to operate in a challenging economic environment. The price of oil has also spiked in recent days amid mounting tensions in the Middle East, which could push up energy costs.
Companies could face renewed pressure over the coming months as the government seeks to strike a trade deal with the EU before the end of 2020. Johnson has said that he would not extend the transition period for holding talks, raising the prospect of a no-deal departure.
Brock added: “Other clouds of uncertainty must also include the potential for further political instability as negotiators and policymakers take the next steps.”
