The UK’s dominant services sector showed tentative signs of recovery at the end of 2022 with businesses reporting an easing in inflationary pressures.
Activity in the services sector, which includes finance, retail and health companies, inched up in December to 49.9 from 48.8, according to a monthly survey of purchasing managers. Any number below 50 on the index indicates contraction and this was the third consecutive month that the PMI has dropped below this level. Economists had forecast a rise to 50.
The service sector had boomed after the end of pandemic lockdown restrictions last year but along with the wider economy has suffered from a slowdown in consumer spending, high energy prices driving inflation and a climb in borrowing costs.
The sector, which accounts for about 80 per cent of the UK economy, reported no change in its employment levels last month, breaking a 21-month streak of jobs growth. Some companies said that they would not replace departing workers or hire new staff as they suffered from a fall in business.
About 40 per cent of surveyed companies said they expected business activity to rise this year, an improvement in optimism following the lows in the aftermath of the mini-budget, but 16 per cent said they expected another year of falling demand .
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Tim Moore, director of economics at S&P Global Market Intelligence, who compiled the survey said concerns about the broader economy “sapped demand”. “Overall levels of business activity fell only fractionally, despite an exceptionally challenging business environment and spending cutbacks due to cost of living difficulties,” he said.
“Survey respondents commented on squeezed disposable incomes, elevated recession risks and a housing market downturn as key factors likely to constrain demand in the year ahead.”
The UK economy is expected to have slipped into a technical recession at the end of last year, with growth hampered by a record cost of living squeeze. Although inflation is likely to have peaked at 11.1 per cent in October, the rate of cost increases is expected to remain above the Bank of England’s 2 per cent target rate this year.
The overall rate of inflation faced by the services sector fell to the lowest in more than a year as energy prices stabilised and supply chain disruptions eased. Businesses still reported, however, that they had “little option” but to pass on to customers their high costs, driven by their growing wage bills.
John Glen, chief economist at the Chartered Institute of Procurement and Supply, which also helped to compile the survey, said parts of the sector were also hit by nationwide travel strikes that “delayed deliveries and reversed recent supply improvements in parts of the service economy”.
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He said: “With another drop in orders, especially from domestic customers, businesses were cautious about building more operating capacity, which in turn will affect job seekers looking for the next pay rise to manage cost of living rises as the country braces itself for another recession.”
