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UK services sector shrinks as inflation hits business confidence

The fall marks the sharpest contraction in business activity since the start of 2021, when pandemic shutdowns limited economic activity. Photo: John Keeble/Getty

The UK services sector saw the biggest drop in business activity since January 2021 as political and economic uncertainty hit demand in October.

Output fell sharply, largely due to squeezed household budgets, recession worries, postponement of business investment due to rate hike fears and supply chain issues in due to the legacy of pandemic shutdowns and Russia’s invasion of Ukraine.

The S&P Global UK Services Purchasing Managers’ Index (PMI) fell to 48.8 in October, slipping below the 50.0 growth threshold where the index stood in September.

However, the PMI data was above an expected drop to 47.2 points.

The fall marks the sharpest contraction in business activity since the start of 2021, when pandemic shutdowns limited economic activity.

Read more: Inflation: Prices for milk, tea bags and sugar soar as food bills hit record highs

The UK service sector has experienced high rates of input cost inflation amid rising staff wages and energy bills, these strains adding to pressure from the depreciation of the pound (GBPUSD=X).

In the UK, the service sector is larger than the manufacturing sector and therefore accounts for the largest share of the country’s economic output, so economic policymakers are watching these results with close attention.

Tim Moore, chief economics officer at S&P Global Market Intelligence, said: “UK service providers reported the biggest drop in business activity for 21 months in October, as household spending cuts and lower investment companies combined to reduce new order volumes.

“A number of companies noted that political uncertainty and rising borrowing costs since the mini-budget had led to greater risk aversion among clients and a wait-and-see approach to new projects.

“Many reports have also pointed to higher energy bills leading to reduced spending on non-essential services.”

S&P Global said: “Although modest, the latest reading signaled the fastest rate of decline since January 2021. Manufacturing output fell at a much faster pace than service sector activity,”

The uncertainty caused by price inflation caused business confidence to fall sharply compared to September.

Private sector growth projections were at their weakest since April 2020.

Moore said: “Stubbornly high inflation, rising borrowing costs and concerns about the UK economic outlook all contributed to weaker business optimism in October. Aside from the early slump of the pandemic, confidence in the service economy is now the lowest since December 2008.”

S&P Global added: “Lower rates of input price inflation were seen in the manufacturing and services sectors in October, despite strong pressure on business spending from rising utility bills. energy and staff salaries”.

Read more: Interest rate: What the Bank of England’s biggest hike in 33 years means for you

The PMI data reinforced other signals that Britain’s economy is slowing month on month, a concern for the Bank of England which is expected to raise interest rates sharply on Thursday.

The combination of stagnating economic growth and inflation could lead to stagflation, a combination of factors that economic policymakers find particularly difficult to manage because trying to correct one can exacerbate the other.

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