Services firms delay signing contracts in 'difficult operating environment'

5 January 2023

Businesses in the UK services sector held off signing new contracts in December amid a “difficult operating environment”, according to the latest PMI.

Firms said they were delaying making commitments to new contracts until 2023, contributing to the fourth successive monthly fall in new business volumes.  

The S&P Global/CIPS UK Services Purchasing Manager's Index rose in December to 49.9, from November's score of 48.8. However, the reading remained below 50 in negative growth territory for the third month in a row. 

The reading is the highest since September but data and anecdotal evidence “nonetheless painted a picture of a difficult operating environment”. 

Cost of living pressures and high inflation reduced consumers' appetite for consumption, and “uncertainty and hesitancy” characterised business decision-making, it found. 

John Glen, chief economist at CIPS, said: “With more uncertainty than ever in the UK economy, squeezed service providers remained hampered by stubbornly high costs and low customer volumes and the sector remained in contraction.

“With reduced output for the third month in a row, the slowest rise in the cost of doing business for 15 months was not enough to stop service providers focusing on getting good value from their supply chains without racing to the bottom on price.”

Glen continued: “This shrinkage has started to impact on job creation levels which stalled for the first time in almost two years. 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. 

“There were some noticeable improvements in the efficiency of supply chains where stocks of essential materials were in greater supply. However, industrial action affected some businesses with transportation issues and delayed deliveries reversing recent supply improvements in parts of the service economy.”

Higher costs resulted from increased fuel and utilities costs, limited supply of goods, and in some cases suppliers seeking to repair damaged profit margins.

Firms said they were left with “little option” but to pass on increased costs, but indicated a reluctance to raise prices too much in face of strong competition. 

Tim Moore, economics director at S&P Global Market Intelligence: “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.”

The results pointed to some signs of positivity despite recession concerns, Moore suggested.

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

“Although service providers widely noted concerns about global economic headwinds and stubbornly high inflation, there were also many reports citing positivity about factors within their control, including forthcoming product launches, expansion into new markets and planned business investment.”

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