Service sector optimism drops to lowest levels since the pandemic

5 October 2022

Business expectations for the next 12 months have dropped to the lowest level since May 2020 as the energy crisis, recession concerns and rising interest rates weigh on the outlook.

The UK services sector saw a loss of momentum in September, “with an 18-month period of output expansion coming to an end”, according to the S&P Global/CIPS UK Services Purchasing Managers' Index (PMI).

The PMI read 50, marking the weakest service sector performance since February 2021. A reading above 50 signals growth and below indicates contraction, meaning the sector flatlined. New orders declined for the first time in 19 months. 

John Glen, chief economist at CIPS, said: “More evidence of weaknesses in the UK economy appeared last month as the services sector flatlined in September, falling to the no-change mark with fewer orders and higher costs affecting output. 

“The new business index was the lowest since February 2021 as domestic consumers had cost-of-living pressures and not hospitality uppermost in their minds. After enjoying rising levels of export orders for eight months in a row, the ongoing effects of Brexit and trade difficulties also reduced overseas enquiries for service companies.”

He noted while 39% of respondents were hopeful that business opportunities would grow, this was down on the 60% of firms that were hopeful for growth at the beginning of the year. Glen said this marked a “significant downturn and a clear indication of the trajectory this year”. 

The PMI comes as the cost of living crisis means almost 60% of the British shoppers expect to rein in spending on non-essential items this Christmas. Research by Retail Economics said this equated to a £4.4bn reduction in spending. 

Around 58% of firms surveyed saw rising input prices in September, while only 1% had seen a decline. Service providers “overwhelmingly” passed on increased costs to clients.

Firms additionally noted an increase in backlogs, which were mostly attributed to supply and labour shortages.

Tim Moore, economics director at S&P Global Market Intelligence, said the data showed “the energy crisis continued to hit business and consumer spending”. 

Firms are seeing “severe pressure on budgets” he said, and noted the pace of job creation has now slowed for three months running amid “greater caution about future growth”. 

Moore continued: “Service sector businesses trimmed their growth expectations to the lowest seen for nearly two-and-a half years in September, which survey respondents linked to concerns about falling disposable income and the unfavourable global economic outlook.” 

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