November data showed a continued loss of momentum in the services sector PMI, with business activity and new orders slowing compared to the previous month. Confidence in the outlook for activity in the coming months fell to its lowest since December 2022, and employment rates fell for the second month running. Many survey respondents pointed to the negative impact of rising payroll costs on demand and hiring plans.
The seasonally adjusted UK Global PMI® Business Activity Index came in at 50.8 in November, down from 52.0 in October and a 13-month low. While this indicated a slight increase in activity, growth was the slowest since the start of the expansion in November 2023. Many firms pointed to negative impacts on growth from economic uncertainty and concerns over tax increases announced in the Autumn Budget.
New business demand continued to rise for the 13th consecutive month in November, partly driven by consumer spending, but the rate of expansion was weaker than ever. Some firms indicated that they had put new projects and investments on hold due to economic concerns. New work from abroad also rose, but grew at a slower pace, despite increased demand from some US clients.
Employment levels fell slightly in November, with firms avoiding hiring and not replacing departing staff in response to wage pressures and National Insurance increases. Some also noted that the lack of pressure on business capacity and efforts to improve operational efficiency had affected demand for staff, leading to a 18th consecutive month of declines in backlogs. A reading above 50 indicates growth, suggesting that the services sector is gaining momentum despite the challenging economic backdrop. This unexpected rise is likely to have significant implications for market sentiment, investor confidence and the Bank of England’s monetary policy.
Market reaction to the final services in GBP
The stronger-than-expected services PMI points to resilience in the UK economy, particularly in the face of persistent inflationary pressures and rising interest rates. The services sector has shown remarkable resilience and innovation, even as consumers tighten their belts amid economic uncertainty. The increase to 50.8 points suggests that businesses are seeing a pickup in activity, supported by increased consumer demand and a gradual recovery from previous turmoil.
Market reactions to the PMI data were cautiously optimistic. Following the release, the pound saw a modest rise against major currencies, reflecting increased confidence in the resilience of the UK economy. Equities, particularly sectors sensitive to consumer spending, reacted positively, with retail and hospitality stocks seeing gains.
However, analysts caution that while the rise is welcome, it does not eliminate the underlying challenges facing the economy. The Bank of England is still grappling with inflation, and a sustained rise in the services PMI could lead to discussions about further monetary tightening. This scenario presents a mixed bag for investors, who must balance immediate positive sentiment with potential future interest rate hikes.
The services PMI components provide further insights into the underlying dynamics of the sector. New business activity, a key indicator of future growth, showed an increase, suggesting that consumer confidence is beginning to recover. However, the survey also highlighted challenges, such as rising costs and labor shortages that continue to strain operations. While businesses are optimistic about the future, the reality of inflation and supply chain disruptions remains a significant hurdle. The balance between managing costs and chasing growth will be key for service-oriented companies in the coming months. Investors are encouraged to monitor how companies respond to these pressures, as their strategies are likely to impact overall market performance.
GBP Services PMI Final Forecast
Looking ahead, the outlook for the current month is cautiously optimistic but moderated by the broader economic environment. Analysts suggest that while the increase in the Services PMI is encouraging, it is important to be mindful of the potential for volatility in the coming months. Factors such as higher energy prices, rising interest rates and geopolitical tensions could temper the positive sentiment generated by the latest PMI reading. Attention will focus on whether this growth trend can continue and whether businesses are able to cope with the complexities of the current economic landscape. Many economists expect the PMI to remain in positive territory, but with less dramatic increases as businesses adapt to ongoing challenges.
In addition, upcoming economic data releases will be crucial in shaping market expectations. The Bank of England’s monetary policy decisions, influenced by inflation and growth indicators, will be closely watched. If the services sector shows continued strength, it could force the Bank to consider tightening monetary policy sooner than initially anticipated. Conversely, if subsequent data shows a slowdown, this could lead to a more dovish stance, which could have implications for the pound and the broader market. Investors will pay particular attention to inflation figures and consumer confidence indicators, as these will provide key insights into the sustainability of service sector growth. This positive momentum could boost investor sentiment in the near term, leading to increased capital inflows into the UK market. Investors often view these growth indicators as a sign of stability, which could encourage them to take positions in UK equities and other riskier assets.
This unexpected increase provides a glimmer of hope for market participants, indicating resilience amid ongoing economic challenges. While the immediate market reaction was positive, investors remain cautious, and mindful.
