In January, UK service sector companies reduced their workforce at the sharpest rate in four years, reflecting growing concerns over weak consumer confidence.
According to the latest S&P Global UK services PMI survey, the sector expanded modestly, registering a score of 50.8, down slightly from 51.1 in December and matching the lowest score in 15 months.
A PMI above 50 indicates growth, whereas below 50 suggests contraction. This figure was also marginally below the anticipated 51.2 forecasted by economists.
Despite a slight increase in output, January witnessed the highest rate of cost inflation in nine months, primarily driven by rising wages and suppliers passing on increased costs ahead of the upcoming rise in national insurance contributions and minimum wage in April.
This inflationary pressure is pushing up consumer prices and presenting a significant challenge for the Bank of England as it prepares to announce its decision on interest rates.
With the bank typically cutting rates only when inflation is contained, it faces pressure to lower rates to stimulate growth amidst high inflation within the services sector, which constitutes about 80% of the UK economy.
Experts are predicting a quarter-point reduction in interest rates to 4.5% in the upcoming decision. Tim Moore, Economics Director at S&P Global Market Intelligence, attributed the challenging conditions faced by service firms to the tax hikes announced in the previous October’s Budget.
He highlighted the emergence of ‘stagflation conditions’—simultaneous inflation and slow growth—as increasingly prevalent.
“Service businesses are grappling with fast-rising input costs for the fifth consecutive month, hitting a peak not seen since April 2024. There’s a notable increase in salary expenses, compounded by suppliers’ efforts to offset impending increases in employers’ national insurance contributions,” Moore explained.
He also noted that high interest rates and geopolitical uncertainty continue to impact businesses, leading to reduced recruitment within the sector.
Andrew Griffith, the Conservative Shadow Business Secretary, described the job cuts as “devastating” and criticized the government’s tax increases, claiming they are causing workers to “pay the price”.
