UK service sector enjoys fastest growth in 24 years as economy reopens

But employers sound the alarm over staff shortages and survey reveals steep rise in costs

Last modified on Thu 3 Jun 2021 08.43 EDT

The reopening of the UK economy from lockdown has fuelled the fastest monthly growth since 1997 in activity in the service sector, which spans everything from pubs and hotels to banking and IT, despite evidence of labour shortages and rising costs for businesses.

In its monthly snapshot, IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) reported a surge in business and consumer spending in May as lockdown restrictions were relaxed across all four nations of the UK.

Employers reported the strongest rate of hiring for more than six years amid a spring boom in the economy, which follows the worst recession for more than 300 years in 2020.

However, the monthly survey of businesses in the sector that includes hotels, restaurants, finance and IT showed mounting pressure on staff wage bills, raw materials and transport fuelled the steepest rise in costs since July 2008.

Amid fears over a burst of inflation in several major economies after lockdown, the combination of soaring demand and rising operating expenses pushed up the prices charged by services providers at the fastest rate since the survey began in 1996.

The IHS Markit/CIPS purchasing managers’ index – a closely watched gauge of activity in the services sector, which is responsible for almost 80% of the UK’s national output – increased to 62.9 in May, up from 61.0 in April. Any reading above 50 denotes that the sector is expanding.

The snapshot comes as employers sound the alarm over staff shortages exacerbated by the pandemic and Brexit, as fewer EU workers travel to Britain to find a job.

Duncan Brock, group director at CIPS, said businesses rushed to increase their operational capacity to meet this demand but were struggling to fill their job vacancies.

“As staff moved on to other opportunities following the pandemic’s impact on lives and priorities, a potential skills gap in the sector means some firms may struggle to meet their new goals.”

Figures from the Office for National Statistics showed that the number of workers on furlough dropped to 2.1 million by mid-May, down from a peak of about 5.1 million in January during the third national lockdown.

About a quarter of the arts, entertainment and recreation workforce and about a fifth of accommodation and food services workers remained on full or partial furlough, above the 8.1% average for all UK workers.

Separate figures from HMRC showed that 1.3 million fewer workers accessed the furlough scheme in March and April, as hiring picked up with employers preparing for the reopening of the economy. According to the tax records, 3.4 million employees remained on furlough at the end of April.

Rishi Sunak said the figures showed the government’s programme of job support was working. “The scheme [furlough] is naturally winding down as people get back to work and take advantage of the opportunities out there in the jobs market,” he said.

The chancellor has come under pressure to stand ready to expand the scheme if the government delays the next stage of its roadmap out of lockdown in England on 21 June as Covid-19 infections rise.

Employers will be forced to contribute 10% of furloughed wage costs from July, rising to 20% in August and September, before the scheme is withdrawn at the end of that month. However, business leaders say this would trigger a wave of job losses if pandemic restrictions are kept in place.

“We’ll continue to support those who need it through to September but I am hopeful that we’ll see more people moving back in to work as we continue on the road to recovery,” Sunak said.

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