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

Pressures: Amid a cost of living crisis, UK households have cut back on spending, particularly in discretionary businesses like hospitality and leisure

UK services sector stagnates as rising utility bills and business pessimism hit customer demand

  • The latest UK services PMI survey showed a reading of 50.0 for September
  • Business optimism for the year ahead has fallen to its lowest level since May 2020
  • UK service sector fares relatively better than manufacturing

Soaring energy prices and widespread pessimism caused the UK’s key services industry to stagnate in September after 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 services sector a reading of 50.0 for September, meaning it has neither increased nor decreased.

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

Pressures: Amid a cost of living crisis, UK households have cut back on spending, particularly in discretionary businesses like hospitality and leisure

Pressures: Amid a cost of living crisis, UK households have cut back on spending, particularly in discretionary businesses like hospitality and leisure

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

Business optimism for the year ahead also fell to its worst level in two and a half years amid signs of a looming recession, recent interest rate hikes and the ongoing energy crisis.

More than half of respondents said their input prices rose in September, while only 1% reported a decline despite inflationary pressures continuing to moderate.

Higher utility bills drove much of the cost increase, but rising employee wages and supplier prices were also noted as major contributing factors.

The report notes that service companies have “mostly” passed on their rising costs to customers, even as households have cut back on spending, particularly in discretionary businesses like hospitality and leisure.

“Domestic consumers had cost-of-living pressures in mind, not hospitality,” remarked Dr. John Glen, chief economist at CIPS.

Britain’s service sector is still doing relatively well compared to manufacturing, which has seen output fall for 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 issues.

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

Joshua Raymond, director of financial brokerage XTB, said: “As the majority of UK GDP is dependent on UK services activity, we are now starting to see the UK recession taking root in UK data sets. .”

“Perhaps the most troubling sign was a slump in new orders for the first time in 19 months as economic activity deteriorated due to rising production costs.”

The speed of job creation has also continued to slow amid labor shortages and anecdotal reports that financial burdens are causing some companies to freeze hiring.

The UK job market is experiencing historically high vacancy rates, which have worsened significantly since the easing of pandemic restrictions.

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