Services firms hire new workers at fastest pace in 17 years

New survey showed firms are creating jobs at a level seen only once since 1997 and bigger salaries

The UK's biggest union, the Trade Union Congress, has lobbied against what it calls the “unfair” treatment of younger workers

A hiring spree among the UK’s powerhouse services firms kept up the rapid recovery pace in May as employers shelled out to secure new staff, a closely-watched survey revealed yesterday.

The Chartered Institute of Purchasing & Supply’s latest snapshot of a sector spanning restaurants to accountants showed hiring matched the fastest pace seen in the survey’s 17-year history. The hunt for workers also pushed running costs up to the fastest pace for four months as wages rose.

Services account for around three-quarters of the economy. The upbeat survey —along with similar healthy signs from manufacturers and builders — puts the UK on course for growth of at least 0.8 per cent in the current quarter. That would be as strong as the first three months of the year and finally take the economy past its pre-recession peak in 2008.

“Firms in the services sector are creating jobs at a level seen only once since 1997 and offering bigger salaries to boot,” said Cips chief executive David Noble.

The survey’s measure of overall activity, where a score over 50 signals growth, edged lower to 58.6 from April’s 58.7 but remains at historically high levels.

Strong growth and rising wages will inevitably provoke debate among the Bank of England’s rate setters, who will conclude their two day meeting today. The Monetary Policy Committee has left interest rates on hold at just 0.5 per cent since March 2009 although inflation is below the 2 per cent target at 1.8 per cent.

Markit’s chief economist Chris Williamson suggested further strong economic data would increase the pressure on the Bank to lift rates. “With every strong PMI reading, the more lively the discussion will become among the Monetary Policy Committee that a pre-emptive early hike in interest rates is warranted” he said.

But Investec chief economist Philip Shaw predicted that the MPC will not move on rates until the middle of next year. “We are in the sweet spot of the cycle where you are getting good news on the recovery but we aren’t getting an inflation threat” he said. “We certainly haven’t seen pressure on the US Federal Reserve to raise interest rates just yet and they have a more-established recovery than the UK.”

The Markit survey reported services firms increasing hiring to deal with higher sales and work outstanding. Backlogs of work rose for a fourteenth successive month in May. Firms also took on staff to implement business expansion plans. They remained confident that activity will continue. They are expecting to take advantage of the improved business climate to bolster market share and expand their businesses.

However, some economists pointed out that while strong hiring by service firms was beneficial in the immediate term, it also pointed to weak productivity growth. “While this is good news for the near-term outlook for consumer spending, productivity growth will need to pick up if the economic recovery is to maintain its present momentum over the medium term” said Samuel Tombs of Capital Economics.