December data from the UK services sector Purchasing Managers’ Index (PMI), compiled by S&P Global Ratings, showed that 2024 ended weak. The sector was hit hard by weak demand and rising wage costs, leading to the biggest decline in business activity since January 2021. This trend continues to weigh on the outlook for next year, with positive sentiment around growth in 2025 remaining at a 23-month low.
Service sector employment falls
The UK services sector has seen its employment decline for three consecutive months. In December, the sector saw its fastest rate of job losses in nearly four years. Some 23% of respondents to the survey reported a decline in workforce levels. This suggests that businesses are facing challenges in hiring amid uncertain economic conditions, reflecting a decline in confidence in the short-term growth outlook.
Activity improves marginally
Despite the decline in employment, the S&P Global UK Services PMI® Business Activity Index improved slightly, rising to 51.1 in December, from 50.8 in November. However, this improvement remains marginal, reflecting that growth in business activity was very weak. For the fourteenth consecutive month, the index remained above the neutral 50.0 level, but indicated only a slight expansion in the sector. Overall, the activity index in the final quarter of 2024 was the lowest in a year.
Demand for services weakened
Sector sales plans continue to face challenges due to weak demand. Survey data showed that total new orders were close to stagnating across the services sector. The index indicated that new orders were at their lowest level since October 2023, with only a small increase in new work recorded. These results were mainly linked to a decline in customer confidence, particularly following the autumn budget announcement and increased National Insurance costs.
Impact of local and global economic conditions
Service providers reported that domestic and international economic conditions were factors that impacted customer demand. New export sales fell for the first time since September 2023. Several respondents reported seeing a decline in demand from EU customers, while others noted increased demand from US markets, highlighting some of the variation in growth across markets.
Rising input costs and persistent inflation
In addition to falling employment, the services sector has faced a significant rise in input costs. Input costs hit an eight-month high, putting pressure on companies in the sector. Inflation in production costs has risen to its highest levels, presenting an additional challenge for companies seeking to maintain their profit margins amid these pressures. This inflation is driven by rising salaries, with some of these increases being passed on to customers, resulting in higher selling prices.
Economic outlook for 2025
UK service providers remain cautious about the outlook for economic activity in 2025. Despite a slight improvement in the activity index, optimism remains very weak. Business sentiment continued to deteriorate, with many concerned about spending cuts from businesses and consumers, as well as the impact of higher employer contributions to National Insurance.
Challenges facing the services sector
The challenges facing the UK’s services sector reflect a combination of domestic and global pressures. With rising labour costs and slowing demand growth, businesses are struggling to maintain positive growth rates. In addition, stagnant new orders have slowed activity in the sector, highlighting the need to further stimulate domestic and international demand. Despite some positive signs, the sector continues to suffer from inflationary pressures and rising costs, placing an additional burden on businesses.
Continuing challenges ahead for the UK private sector
The UK’s economic challenges continue as we enter 2025, with the UK’s economic reality showing that these challenges will continue. In the final months of 2024, businesses were facing increasing pressure from rising costs and weak demand for their services. In the near future, these challenges are expected to continue, which could significantly impact the performance of the economy.
Rising input costs and their implications for businesses
Inflation in input costs continues to impact the private sector, with wages and raw materials costs continuing to put pressure on businesses. Despite some slight price increases, many businesses are still unable to pass on these increases to customers due to weak demand. This means that UK businesses may have to make tough decisions such as cutting staffing or reducing production. Rising operating costs could also lead to lower profit margins, adding to the challenges these businesses face in the future.
Weak demand and a disappointing economic outlook
Demand levels in the private sector remain weak, suggesting a potential recession in the near future. Economic expectations for the future have been low throughout 2024, and these concerns are likely to persist into 2025. Data points to a decline in new orders and a slowdown in business activity, which is worrying for companies that have been relying on expanding domestic and foreign demand to strengthen their financial position. In addition, companies indicate that general sentiment around the economy was negative at the end of 2024, with growing concerns about the impact of upcoming tax.
Negative impacts on the labour market and employment
One of the most significant challenges facing the UK in the near future is the deterioration in the labour market. Private sector companies have recorded a continued decline in headcount, with the decline being the fastest since the start of 2021.
 compiled by S&P showed that 2024 ended on a weak note){kind=link}