Soaring cost of living leaves service sector at its weakest in two years, but recession fears fail to blight UK business optimism
The UK’s service sector saw business activity at the start of 2023 decline for the fourth consecutive month, with the weakest performance for two years.
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.
Although only marginal, the rate of decline for overall business activity was the fastest since January 2021.
Squeezed household budgets affecting consumer spending, and cautious budget setting from corporate clients were cited as key reasons for declining activity this month.
Business activity expectations for the next 12 months are expected to improve with an easing of inflation and expectations of energy market trends appeared to have boosted output growth projections
Operating expenses increased at the weakest pace since August 2021, helped by lower fuel bills. However, many survey respondents reported sharp rises in staff wages due to tight albour market conditions, alongside higher utility bills.
Companies reporting a drop in business activity typically cite squeezed household incomes and cautious budget settling by corporate clients, which was linked to strong inflation and rising economic uncertainty.
Subdued demand was also reflected in the amount of new business, which fell for the fifth consecutive month.
Those businesses who took part in the survey suggested heightened recession risks and higher borrowing costs were among the main factors holding back new orders.
The rate of job creation was among the slowest seen over the past two years. Additional staff hiring was often linked to long-term business expansion plans, but some firms noted lower employment numbers due to cost cutting and a lack of candidates to fill vacancies.
Average prices charged by service sector companies increased sharply at the start of 2023 and, in contrast to the trend for input costs, the rate of inflation accelerated slightly since December.
Businesses cited the need to pass on increasing staff costs and utility bills. Where lower prices charged were reported, this often reflected reductions in fuel surcharges.
Around 48 per cent of the survey panel forecast an increase in business activity during the year ahead, while only 12 per cent predicted a fall, the net result being the strongest degree of positive sentiment since April 2022.
Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: “January data pointed to the weakest service sector performance for two years as cutbacks to business and
consumer spending resulted in a fourth consecutively 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.
“However, the downturn in service sector output remained relatively shallow at the start of 2023.
“Encouragingly, new order volumes moved closer to stabilisation and export sales picked up in January, which contributed to a marginal upturn in overall employment numbers.
“Intense pressure on costs from rising energy bills and tight labour market conditions led to another sharp rise in business expenses. Cost pressures are still higher than at any time in the two decades prior to the pandemic, but the overall rate of inflation eased to its lowest since August 2021 as reduced fuel prices offered some relief.”
Dr John Glen, chief economist at the. Chartered Institute of Procurement and Supply (CIPS) added: “The lag in business activity is a result of cautious budget setting, recession risk, and a drop in consumer spending.
Glen said Winter iwas still biting for UK service providers. “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.”
With agencies