Japan's services activity stagnates in May as costs surge, PMI shows

TOKYO, June 3 (Reuters) - Japan's services sector ground to a halt in May after more than a year of expansion, as surging costs linked to the Middle East war dampened service demand and led to a 12-year high in output price inflation, a private survey showed on Tuesday.

* The S&P Global final Japan Services Purchasing Managers' Index (PMI) fell to 50.0 in May from 51.0 in April, marking the end of a 13-month expansion streak. Readings above 50.0 indicate growth in activity, while those below point to a contraction.

* New business growth slowed for the third consecutive month, rising at the weakest pace in nearly two years. In particular, new export business fell sharply, marking the biggest drop since March 2022, as subdued external demand and rising prices weighed on overseas sales.

* Meanwhile, cost pressures intensified sharply. Input prices rose at the fastest rate in more than three years. The surge was largely attributed to supplier price hikes for fuel, energy and raw materials amid the Middle East war, as well as higher labour costs, according to the survey.

* In response, service providers raised their selling prices at the fastest pace since April 2014, when a consumption tax rise to 8% from 5% triggered sweeping price hikes.

* Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, said: "Rising prices have also impacted demand, especially within the service sector, as households' budgets have come under greater strain."

* Employment growth slowed to the weakest rate in nine months. Some firms cited staff retirements and resignations as factors constraining workforce expansion.

* Business confidence regarding the year-ahead outlook improved slightly for the second straight month but remained weaker than the post-pandemic average due to geopolitical uncertainty, rising costs and demographic challenges, according to the survey.

* The broader picture showed Japan's Composite PMI, which includes both manufacturing and services, also fell to 51.1 in May from 52.2 in April, marking the slowest growth in five months. The relatively robust manufacturing sector is partly "boosted by temporary stock building, which is expected to fade once warehouses are deemed sufficiently stocked and if global economic conditions remain fragile," Fiddes said. (Reporting by Kantaro Komiya; Editing by Sam Holmes)