Service sector sees fastest growth in 24 years – business news 4 June 2021.

James Salmon, Operations Director.

Service sector sees fastest growth in 24 years, furlough figure falls in May,  recruitment surges as worker pool shallows, G7 set to talk tax and a lot more business news.

Service sector sees fastest growth in 24 years

The reopening of the economy from lockdown has seen the fastest monthly growth in service sector activity in a quarter of a century.

The IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose to 62.9 in May from 61.0 in April, taking it to its highest since May 1997 and above an initial estimate of 61.8 on an index where a reading above 50 points to growth.

The report shows that firms reported the strongest rate of hiring for more than six years, while some saw staff shortages and had to increase pay. It was also found that increased demand and rising operating expenses saw prices charged by services providers climb at the fastest rate since the survey began in 1996. The soaring demand was driven by domestic activity, with the pandemic and Brexit cited among reasons for a decline in services exports.

The composite PMI, which includes the manufacturing sector, climbed from 60.7 to 62.9. IHS Markit’s economics director, Tim Moore, said the survey results “set the scene for an eye-popping rate of UK GDP growth” in Q2, with this led by the reopening of customer-facing parts of the economy after the most recent lockdowns.

Howard Archer, chief economic adviser to the EY Item Club, said the “elevated levels” of the May PMIs are “particularly impressive”, adding: “They support belief that the UK economy is very much on course for a strong rebound in the second quarter.”

The Eurozone services PMI rose to 55.2 from 50.5 in April indicating vigorous expansion. The reading has stayed above 50 for three consecutive months now.

The US Institute of Supply Management (ISM) showed a reading of 64% in May up from 62.7% in April ahead of consensus forecasts of 63%. This was a record reading for the survey

Furlough figure falls in May

Office for National Statistics figures show that the number of workers on furlough dropped to 2.1m by the middle of last month, having hit a 2021 peak of more than 5m in January.

Separate figures from HMRC showed that 1.3m fewer workers accessed the scheme in March and April, with employers taking on staff ahead of the reopening of the economy. HMRC’s tax records show 3.4m employees remained on furlough at the end of April. Analysis shows that 11.2m employees have received support from the job retention scheme since the start of the pandemic.

Commenting on the figures, Chancellor Rishi Sunak said the furlough scheme is “naturally winding down as people get back to work and take advantage of the opportunities out there in the jobs market”.

Recruitment surges as worker pool shallows

A report from the Recruitment and Employment Confederation (REC) and KPMG shows that firms are expanding their workforces at a record pace as the easing of lockdown restrictions drives a surge in activity. May saw permanent job placements rise at the fastest rate since the REC began collecting data in 1998, while the number of available candidates declined, with the supply of workers falling at the quickest rate since May 2017.

Claire Warnes of KPMG said: “With demand for workers in May increasing at the fastest rate in 23 years, the jobs market seems to be firing on all cylinders.” She added: “We need this momentum to continue for our economy and businesses to fully bounce back.”

Pandemic set to cost 100m jobs

The International Labour Organisation (ILO) says the pandemic will destroy the equivalent of 100m full-time jobs worldwide this year, with the UN agency warning that the global jobs market will not recover until 2023 at the earliest. The organisation said that businesses were not creating roles as quickly as the supply of labour was growing and warned that the “jobs gap” would reach 75m this year – or 100m including reduced hours. It added that the gap is likely to fall to 23m in 2022.

Analysis suggests that global unemployment will hit 205m next year, exceeding pre-pandemic levels of about 187m and meaning a global unemployment rate of around 5.7%. The ILO has urged policymakers to target job creation, saying: “There can be no real recovery without a recovery of decent jobs”.

Firms look to reduce office space as work goes hybrid

A PwC poll suggests large employers are set to reduce their office portfolio by up to 9m square feet as firms make a move toward hybrid working. In a survey of the UK’s 258 largest firms, half said that they were planning to reduce their office space, with a third expecting reductions of more than 30%. With the coronavirus crisis driving a shift to remote working, just 10% of those polled said that they expect the number of employees working in the office will return to pre-pandemic levels, with around half of the executives saying employees are likely to work virtually two to three days a week. PwC’s Angus Johnson said the shift to hybrid working is now “pretty much embedded into the working culture of many organisations.”

Global house prices climb at fastest pace since 2006

Global house prices have jumped at their fastest pace in almost 15 years, with Knight Frank analysis showing a 7.3% increase in average prices in the year to March. This marks the fastest increase since Q4 2006.

Turkey recorded the biggest jump in typical values at 32%, while New Zealand saw the next steepest climb, with prices up 22%.

The UK’s 10.2% increase saw it rank 12th.

Researchers said emergency support measures such as the stamp duty holiday have largely protected the UK housing market from the pandemic. Kallum Pickering, senior economist at Berenberg, comments: “The end of the stamp duty holiday will probably take the immediate heat out of the market, but UK household fundamentals are in good shape”.

G7 set to talk tax

The Independent looks ahead to talks between G7 finance ministers which kick off in London today, saying US proposals for deterring tax avoidance by multinational companies “will be a major theme”. President Joe Biden is pushing for a global minimum corporate tax of at least 15%. The paper says endorsement of the plan by the G7 could help build support for a deal as part of ongoing talks among more than 140 countries convened by the Organization for Economic Cooperation and Development.

Elsewhere, the Telegraph says that while talks to revamp the international tax system will be “high on the agenda”, key details remain unresolved in the negotiations. It says the UK is “at odds” over President Biden’s push for a global minimum corporation tax rate, with Britain eager to secure a bigger share of tax revenues from US companies.

EY’s Chris Sanger says a global minimum tax “basically means the tax is being paid at the HQ location which is unlikely to be in the UK”, while Melanie Reed at Moore Kingston Smith says “every government is looking at their own coffers and deciding what they need”.

Meanwhile, The FT says the UK is “cautiously optimistic” the G7 can agree the “broad outlines” of a deal on taxing multinationals this weekend.

Chancellor ‘confident’ of reaching tax agreement

Chancellor Rishi Sunak says he is “confident” of reaching a global agreement on digital taxation ahead of a meeting of G7 finance leaders. Mr Sunak said: “Securing a global agreement on digital taxation has also been a key priority this year – we want companies to pay the right amount of tax in the right place, and I hope we can reach a fair deal with our partners.” Adding that he is determined to see nations “work together and unite to tackle the world’s most pressing economic challenges”, he added that he is “hugely optimistic that we will deliver some concrete outcomes this weekend.”

Meanwhile, the Telegraph says Mr Sunak has used his first face-to-face meeting with the US Treasury Secretary Janet Yellen to demand a crackdown on big tech tax avoidance.

EU finance ministers call for G7 tax agreement

In a letter the Guardian, the finance ministers of France, Germany, Italy and Spain have on the G7 to deliver agreement on plans to curb tax abuse by multinational companies. Saying their nations have spent more than four years “working together to create an international tax system fit for the 21st century”, they say it has been a “saga of many twists and turns” and insist “now it’s time to come to an agreement”.

The paper’s Richard Partington says that while tax reforms are being negotiated between 135 countries at the Organisation for Economic Cooperation and Development, some nations are pushing for a “firm statement” from the G7, while others are seeking agreement between the G20, possibly “so as to avoid the impression of a stitch up between the largest economic powers.”

Microsoft subsidiary paid zero corporation tax on £220bn profit

Microsoft Round Island One, an Irish subsidiary of Microsoft, made a profit of £222bn last year but paid no corporation tax as it is resident for tax purposes in Bermuda. Paul Monaghan, the chief executive of the Fair Tax Foundation, said: “The tax aggression being displayed by Microsoft, and facilitated by Ireland, is beyond belief”.

Ged Nash, a finance spokesperson for Ireland’s opposition Labour party, said: “A system that allows arrangements like this to exist is unethical, immoral and unjustifiable, and needs to change radically.”

Activist investor interest in UK firms rises

UK firms have seen interest from activist investors increase after the coronavirus crisis, new research from Alvarez & Marsal shows. The report says 59 UK corporate firms have been identified as likely to face a campaign from activist investors in the near future, with ESG issues a particular focus of investor campaigns.

Malcolm McKenzie of Alvarez & Marsal comments: “While activist wolfpacks are nothing new, they are now increasingly being joined by a broader set of stakeholders, who might not look like your ‘typical activist’, calling for change, particularly around ESG.” He adds that firms “must have a strategy in place to balance this wider range of demands, which are often competing, or face being cornered on all fronts”.

Scottish GDP to hit pre-pandemic levels by Q1 2022

Analysis by KPMG suggests Scotland’s economy could return to pre-pandemic levels by the first quarter of next year, with the report saying the pace of Scotland’s economic recovery is “accelerating”. The firm’s forecast indicates GDP will grow by 6.4% in 2021 and 5.2% next year. KPMG said Scotland’s GDP growth was projected to fall slightly behind the UK as a whole during 2021 and 2022, with UK GDP forecast to grow by 6.6% in 2021 and by 5.4% in 2022.

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