Services sector declines to two-year lows but firms showing ‘cautious optimism’

The UK’s service sector saw its weakest performance for two years this month as businesses battled dampened consumer spending and corporate budgets, according to an influential survey.

The S&P Global/CIPS UK services PMI survey showed a reading of 48.7 in January, down from 49.9 in December, although it came in slightly above economists’ expectations of 48.

It was the fourth month in a row that the score came in below 50, which is considered a decline.

Tim Moore, the economics director of S&P Global Intelligence, which compiles the survey, said the data pointed to the weakest service sector performance for two years.

Businesses were struggling to place new orders amid recession fears and higher borrowing costs, the survey suggested.

Service providers – which includes everything from restaurants, pubs, hotels, hairdressers and  builders – also reported seeing cutbacks to consumer spending in the tougher economic climate.

Furthermore, labour shortages have continued to pose challenges for businesses, pushing up costs due to greater pressure to raise wages.

Mr Moore said: “January data pointed to the weakest service sector performance for two years as cutbacks to business and consumer spending resulted in a fourth consecutive monthly reduction in output levels.

“The latest survey illustrates that the UK economy risks falling into recession as labour shortages, industrial disputes and higher interest rates take their toll on activity.”

However, businesses reported feeling the most optimistic they had been since April last year, amid “tentative signs” of a turnaround in the global economic outlook.

More firms were hopeful in their growth prospects, partly because of hopes that energy prices will soon come down, the survey highlighted.

The overall rate of cost inflation was also the lowest since August 2021 in a further sign that businesses are over the worst of the cost challenges.

Mr Moore added: “Cost pressures are still higher than at any time in the two decades prior to the pandemic, but the overall rate of inflation eased to its lowest since August 2021 as reduced fuel prices offered some relief.

“Hopes of a sustained drop in input cost inflation, alongside more favourable energy market trends and fewer concerns about the global economic outlook, helped to boost business activity expectations for the year ahead to the strongest reported since April 2022.”

Dr John Glen, chief economist at the Chartered Institute of Procurement and Supply (CIPS) stressed that there are “cautious signs of optimism on the horizon”.