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

Rising energy prices and widespread pessimism caused the UK’s main services sector to stagnate in September after 18 months of consecutive growth.

The latest Purchasing Managers’ Index survey by S&P Global and the Chartered Institute for Procurement and Supply gave the country’s services sector a value of 50.0 for September, meaning it did not grow or contract.

This figure was 0.9 percentage points lower than the previous month and represented the sector’s weakest performance since February 2021, when Britain was in the midst of its third national lockdown.

New orders and export volumes fell last month, with the latter being blamed for Brexit-related trade problems and worsening global economic conditions.

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

More than half of respondents said their input prices had risen in September, with only 1 percent reporting a decline, despite inflationary pressures continuing to ease.

Higher utility bills accounted for much of the cost increase, but rising employee salaries and supplier prices were further cited as major contributing factors.

The report noted that service companies passed on their rising costs “overwhelmingly” to customers, although households have cut back, particularly in discretionary occupations such as hospitality and leisure.

“Domestic consumers were under pressure on the cost of living, not on hospitality,” noted Dr. John Glen, chief economist at the CIPS.

The UK services sector continues to perform relatively well against the manufacturing sector, where production has fallen 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 problems.

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

Joshua Raymond, the director of financial brokerage XTB, said: ‘As the bulk of UK GDP relies on UK services activity, we are now starting to see the UK recession becoming entrenched in UK data sets.

“Perhaps the most disturbing sign was a decline in new orders for the first time in 19 months as economic activity deteriorated on the back of higher production costs.”

The rate of job creation has also continued to slow against a background of labor shortages and anecdotal reports that high costs are causing some firms to freeze hiring.

The UK labor market has historically high vacancy rates, which have deteriorated significantly since pandemic restrictions were eased.