The Times - UK (2022-06-08)

38 Wednesday June 8 2022 | the times

Business

Services sector hit by high cost of living

Growth in the dominant services sector
has slowed to its weakest pace in more
than a year as soaring inflation bites on
margins and a slowing economy hits
consumer demand.
A closely watched survey of pur-
chasing managers showed that output
in the services sector fell from 58.9 to
53.4 in May, the weakest since February
last year. However, the figure is better
than economists’ forecasts of a drop to
51.3 last month; any number above 50
indicates growth in the sector.
The services sector, which makes up
80 per cent of the economy, reported its
weakest outlook for new business since
October 2020, alongside widespread
increases in energy prices. Cost infla-

tion rose at the steepest pace since the

survey began in July 1996, with 70 per

cent of respondents saying their com-

pany’s average costs had risen in May.

“Service providers are increasingly

concerned about the near-term busi-

ness outlook, with price resistance

among consumers and escalating cost-

of-living pressures set to dampen

spending during the second half of

2022,” Tim Moore, economics director

at S&P Global, which carries out the

PMI survey, said. “Growth expecta-

tions have dropped each month since

the invasion of Ukraine.”

UK economic growth contracted in

March and is heading for a sharp quar-

terly decline in the autumn, when

household gas and electricity bills will

rise by an average of £800, according to

the Bank of England. Rising inflation

had led to services such as leisure and

travel receiving a boost, as consumers

switched their spending from more

expensive goods to services-driven

activities such as holidays.

However, persistent energy price in-

flation means companies in all sectors

are passing on higher costs to their cus-

tomers. The 5.5-point monthly drop in

services output is the worst fall outside

the Covid-19 lockdown period.

The record low unemployment rate

of 3.8 per cent is also leading to higher

wage demands in the sector as compa-

nies struggle to hire new people to fill

vacancies. Total employment in the

sector remained unchanged in May,

according to the survey.

Duncan Brock, group director at the

Chartered Institute of Procurement &

Supply, which collaborates on the sur-

vey, said: “One bright spot was strong

employment levels. Jobseekers still had

the pick of the bunch in terms of roles

and requested salaries, but as capacity

levels are reached and new order gaps

appear the window of opportunity is

starting to close. Recessionary fears are

growing... amid the realisation that

2022 as the year of stable recovery has

not materialised yet.”

The PMI reading will complicate the

outlook for the Bank of England at its

monetary policy meeting next week, as

the survey pointed to slowing growth

with higher inflation still being passed

on to consumers, Martin Beck, of the

EY Item Club, the forecasting body,

said. Inflation hit 9 per cent last month

and is forecast to climb above 10 per

cent this year, five times the Bank’s tar-

get rate.

Beck warned, however, that PMI

surveys risked overestimating falls in

business confidence. “The indices have

been vulnerable in the past to respon-

dents’ sentiment intruding on what is

supposed to be a measure of changes in

output. It follows that activity may not

be slowing as fast as the latest PMIs

suggest,” he said.

Pantheon Macroeconomics said the

May PMI numbers pointed to quarter-

on-quarter economic growth of 0.3 per

cent in the three months to June. How-

ever, Samuel Tombs, its UK economist,

warned that the economy was more

likely to register an outright contrac-

tion of 0.2 per cent in the quarter.

Mehreen Khan Economics Editor

Investors’

vote of no

confidence

in sterling

The pound has fallen to a three-week

low against the dollar and is under-

performing leading currencies after a

fresh bout of political uncertainty over

Boris Johnson’s leadership.

It slipped by 0.3 per cent yesterday

morning to $1.24 against the dollar, its

weakest level since May 19, after the

prime minister narrowly survived a

confidence vote among Conservative

MPs. Sterling was already suffering at

the expense of a strengthening green-

back boosted by higher interest rates in

the world’s largest economy and rising

oil prices.

Johnson won by 211 votes to 148 in the

Tory parliamentary party poll on

Monday. This pushed the pound down,

because some investors had hoped his

ousting would lead to an improvement

in relations with the European Union

over the Northern Ireland protocol.

Derek Halpenny, currency strategist

at MUFG Bank, said Johnson’s victory

may prove “hollow” as 41 per cent of

Conservative MPs had voted against

him, a higher proportion than that

faced by Theresa May, his predecessor,

in her confidence vote in 2018.

Johnson has told the cabinet that he

wants to “draw a line” under the vote to

focus “exclusively” on issues other than

his leadership and to work to “cut costs”

for families across the country.

However, Halpenny said: “A divided

party is not favourable for getting poli-

cies through parliament. The economic

outlook will be far more difficult to get

through with a PM who lacks support.

Difficult policies such as altering the

framework of the Northern Ireland

protocol... point to further divisions

down the road. We already have ster-

ling forecasts that indicate under-

performance and a weaker UK/US ex-

change rate than the current spot level

through to the third quarter. The out-

come of the vote is consistent with our

bearish sterling view.”

Mehreen Khan

A

ustralia’s central

bank has

announced the

biggest interest

rate rise for

more than two decades and

has promised more

monetary policy tightening

to come, thereby joining a

growing club of inflation

hawks (Mehreen Khan

writes).

The Reserve Bank of

Australia increased its main

interest rate by 50 basis

points. It also promised to

“take further steps in the

process of normalising

monetary conditions in

Australia over the months

ahead”, adding that it was

“committed to doing what

is necessary to ensure that

inflation in Australia

returns to target over time”.

The scale of the move

surprised investors, who

responded by buying up the

Australian dollar and

selling short-term

government bonds that are

sensitive to rate rises.

The world’s central banks

are aiming to put a lid on

soaring inflation caused by

rising energy and food

prices in the wake of the

war in Ukraine and higher

consumer demand after the

end of lockdown

restrictions in most parts of

the world.

The European Central

Bank will meet for its latest

policy decision today and

tomorrow, where

policymakers will confirm

the end of its mass bond-

buying programme and will

pave the way for the

eurozone’s first rate rise

in more than a decade in

July.

Economists at Bank of

America believe that the

ECB will follow the US

Federal Reserve and

Australia’s central bank in

opting for an aggressive 50

basis point interest rate rise

in July and in September,

the first such rise in its

history. “July remains a

very close call, but we can’t

see the ECB avoiding a 50

basis point move by

September, at the latest,”

Ruben Segura-Cayuela,

Europe economist at Bank

of America, said.

Central bankers are

turning towards larger rate

rises to contain inflation

that is at up to four times

their target levels.

Three of the Bank of

England’s nine-strong

monetary policy committee

voted for a 50 basis point

rise at its meeting in May,

but were outvoted in favour

of a 25 basis point rise to

take the rate to 1 per cent.

Australia

joins the

inflation

hawks club

Biffa takeover could still end in bin over tax bill

Continued from page 35
due to report profits of about £75 mil-
lion on revenues of £1.2 billion for the
past year.
While Biffa clears the bins for more
than two million households, its biggest
business is removing waste from indus-
trial and commercial premises, shop-
ping centres, sports stadiums, pubs and
restaurant chains. It also has emerged
as a leading player in the plastics re-
cycling market, where it gets paid twice:
once for taking plastic bottles away as
rubbish; then when it sells the recycled
plastic as pellets back to the drinks
industry.
Biffa is also joining the energy-from-

waste revolution and is building incin-

erators. Energy Capital Partners, which

is based in New York, describes itself as

an “energy transition” investor special-

ising in “power generation, renewable

and storage assets and critical sustain-

ability and decarbonisation infrastruc-

ture”. It has not invested in the British

waste market, but has owned an

energy-from-waste business here. That

indicates it is probably most interested

in Biffa’s recycling and energy interests.

When KKR bought Viridor, Biffa’s

UK rival, for £4.2 billion in 2020, it sold

off the waste collections business to

Biffa to concentrate on Viridor’s renew-

able power-generation interests.

US private equity bids

Target Bidder Deal value (excluding debt)

(Completed)

*Since ruled itself out Source: Dealogic

KKR $2.2bn

Warburg

Pincus $2.3bn

I Squared $1.5bn

Sycamore

Partners* $350m

ALAMY

Pound v dollar

Source: Refinitiv

2017 18 19 20 21

$1.50

1.40

1.30

1.20

1.10

Bondi beach in Sydney.

The central bank raised

rates by 50 basis points