UK services sector remains in contraction territory

The UK services sector remained in contraction territory at the end of last year, according to a survey released on Thursday.

The S&P Global/CIPS purchasing managers’ index for the sector rose to 49.9 from 48.8 in November, coming in below the initial estimate of 50.0, which is also the level that separates contraction from expansion.

Around 40% of the survey panel said they expect a rise in business activity over the next 12 months, while 16% expect a decline. 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.

Tim Moore, economics director at S&P Global Market Intelligence, said: "UK service providers ended the year with another downturn in new orders as strong inflationary pressures and worries about the economic outlook 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.

"Stalling recruitment and lower backlogs of work added to signs that service sector companies are now experiencing fewer capacity pressures. Business optimism has recovered from the lows seen in the wake of last September's 'mini-budget', but many firms are braced for a sustained period of subdued demand in 2023."

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said December’s PMI is consistent with the UK economy sliding into recession in the fourth quarter.

"The number of businesses reporting falling activity narrowly exceeded those reporting an increase for the fifth month in a row, albeit by a smaller margin than in November," she said.

"In addition, output was supported by firms ploughing through their order backlogs and replenishing their inventories. Both these supports are temporary and will not be able to offset the underlying weakness in demand for much longer."