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Britain’s services sector flatlines amidst surging utility bills and business pessimism

Britain’s services sector flatlines as surging utility bills and business pessimism hits customer demand

  • The latest UK Services PMI survey posted a reading of 50.0 for September 
  • Business optimism for the year ahead fell to its lowest level since May 2020
  • Britain’s service sector is performing comparatively better than manufacturing 

Soaring energy prices and widespread pessimism caused the UK’s key services industry to stagnate in September following 18 months of successive growth.

The latest Purchasing Managers’ Index survey from S&P Global and the Chartered Institute for Procurement and Supply gave the country’s service sector a reading of 50.0 for September, meaning it neither expanded nor shrunk.

This figure was 0.9 percentage points down from the prior month and represented the industry’s weakest performance since February 2021, when Britain was in the middle of its third national lockdown.

Pressures: Amidst a cost-of-living crisis, Britain’s households have been cutting back spending, particularly in discretionary trades like hospitality and leisure

New orders and export volumes fell last month, with the latter blamed on Brexit-related trade difficulties and poorer worldwide economic conditions. 

Business optimism for the year ahead also declined to its worst level in two-and-a-half years amid signs of an impending recession, recent interest rate hikes and the current energy crisis.

More than half of survey respondents said their input prices had gone up during September, whereas only 1 per cent reported a drop despite inflationary pressures continuing to moderate.

Higher utility bills drove much of the increase in costs, but rising employee salaries and supplier prices were further observed as major contributory factors.

The report noted that service firms ‘overwhelmingly’ passed their increasing costs onto clients, even though households have been cutting spending, particularly in discretionary trades like hospitality and leisure.

‘Domestic consumers had cost-of-living pressures and not hospitality uppermost in their minds,’ remarked Dr John Glen, chief economist at the CIPS.

Britain’s service sector is still performing comparatively well against manufacturing, which has seen output fall over the past three consecutive months.

The S&P Global/CIPS UK Manufacturing PMI posted a score of 48.4 for September, with survey participants largely blaming weak demand and supply chain problems.

Yet manufacturing represents less than 10 per cent of the country’s economic output and only 7 per cent of total employment, while the corresponding figure for services is nearly 80 per cent.

Joshua Raymond, the director of financial brokerage XTB, said: ‘Given that the majority of UK GDP is reliant on UK services activity, we are now starting to see the UK recession become entrenched in UK data sets.

‘Perhaps the most troubling sign was a fall in new orders for the first time in 19 months as economic activity deteriorated due to higher output costs.’ 

At the same time, the speed of job creation continued to slow against a backdrop of labour shortages and anecdotal reports that cost burdens are leading some companies to institute hiring freezes.

Britain’s employment market is experiencing historically high vacancy rates, which have worsened considerably since pandemic restrictions were loosened.