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UK services sector has worst month in two years

Services  The financial district can be seen as people walk across Millennium Bridge, amid the coronavirus disease (COVID-19) outbreak, in London, Britain, December 14, 2020. REUTERS/Henry Nicholls
Services output in Britain fell for a fourth straight month. Photo: Henry Nicholls/Reuters (Henry Nicholls / reuters)

January was the worst month for the UK’s services sector in two years, as it was hit by cutbacks to business and consumer spending.

The S&P Global/CIPS UK services PMI survey showed a reading of 48.7 in January, down from 49.9 in December. Any reading below 50 is considered a decline.

Squeezed household budgets affecting consumer spending, and cautious budget setting from corporate clients were cited as key reasons for declining activity at the start of the year. Both are linked to strong inflation and rising economic uncertainty.

Read more: Bank of England raises interest rates to 14-year high of 4%

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It is the fastest decline in business activity since January 2021, and is the fourth month running in which the PMI has been below 50, which shows a contraction.

Tim Moore, economics director at S&P Global Market Intelligence, 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.”

Still, there are signs that inflation is easing, with companies reporting that lower fuel bills lead to another slowdown in cost inflation. Also, stronger levels of optimism regarding growth prospects were linked to tentative signs of a turnaround in the global economic outlook.

“The lag in business activity is a result of cautious budget setting, recession risk, and a drop in consumer spending. Winter is still biting for UK service providers,” John Glen, chief economist of the Chartered Institute of Procurement and Supply (CIPS), said.

Read more: Brexit 'costing the UK economy £100 billion' a year

“But supply chain managers in the sector are clearly putting growth in their new year resolutions thanks to rebounding supply chains. Stabilising energy costs, combined with a resurgence in demand from the US and Asia, hint that the worst may be behind us.

“Business optimism is growing, shown by The Future Activity Index posting its highest monthly gain since November 2020, as businesses predict a return to growth and investment,” he added.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics said the UK’s services sector PMI remained “consistent with a mild recession in the first half of this year, despite the modest upward revisions to most of the components between the flash and final estimates.”

He stated: “On past form, the composite PMI points to a 0.2% quarter-on-quarter contraction in real GDP in Q1, if it holds steady for the rest of the quarter.”

He added this number does not cover the retail, construction or public sectors, all of which will struggle in quarter one in his opinion.

“Households demonstrated last year that they are more willing to reduce their expenditure on goods than on services in response to the squeeze on their real incomes,” he commented.

“In addition, the construction sector will be hit hard by the surge in borrowing costs, while output in the public sector will fall in Q1 after it was boosted in Q4 by the rollout of COVID booster jabs.”

Watch: What is a recession and how do we spot one?

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