Fastest drop in employment in four years The S&P Global UK Services Purchasing Managers’ Index (PMI) data pointed to a sustained expansion in business activity. However, new business inflows fell in January and the pace of job losses accelerated to a four-year high.
At the same time, higher payroll costs continued to intensify input price pressures at the start of 2025. The overall cost inflation rate was the highest in nine months, leading to a strong and accelerating rise in average prices charged by service sector companies.
Adjusted for seasonally adjusted effects, the S&P Global UK Services Business Activity Index (SBI) came in at 50.8 in January, down slightly from 51.1 in December and a joint 15-month low (equivalent to November 2024). The latest reading was also well below the pre-pandemic average and indicated only a marginal increase in service sector output.
Service providers widely cited headwinds to growth from cost-cutting and increased risk aversion among business clients as well as delayed investment plans. At the same time, there were also reports of weaker consumer confidence and reduced non-essential household spending.
Total new work fell slightly in January, ending a 14-month period of continuous expansion. While some service providers cited the impact of global economic uncertainty and higher interest rates, many firms also linked the drop in new orders to weaker business confidence in the wake of the autumn budget. Where new work growth was recorded, respondents typically cited strong demand for technology services. Overall input price inflation hit an 18-month high in January.
Fourth straight month of job cuts UK
Export sales fell for the second straight month, albeit to a lesser extent than in December. Resilient demand from US clients was reportedly offset by lacklustre spending across Europe. January data pointed to a marked fall in backlogs of work across the services economy. Typically reflecting spare capacity after a sustained period of weak demand.
The latest fall in backlogs was the sharpest since August 2023. Headcount was cut for the fourth month in a row. The rate of job losses accelerated to its fastest since January 2021. Anecdotal evidence suggested that rising payroll costs and falling margins prompted a hiring freeze and focus on improving operational efficiency.
Rising payroll payments and efforts by suppliers to pass on higher payroll costs contributed to the strongest pace of cost inflation since April 2024. Similarly, prices charged by service sector firms rose to their highest level in 13 months. This was despite some reports of price discounting to stimulate sales.
Concerns over squeezed margins. Weak customer demand and a lacklustre UK economic growth outlook were cited as weighing on business confidence in January. The latest survey indicated the lowest level of optimism about the outlook for service sector business activity next year since December 2022.
Employment fell at the fastest pace since November 2020. January data indicated private sector employment levels fell for the fourth consecutive month. Aside from the pandemic. The pace of job losses was the steepest since the global financial crisis more than 15 years ago. The decline in workforce numbers reflected weak demand conditions and ongoing efforts to mitigate high wage costs.
Business activity expectations for the year ahead fell in response to weak demand in January
The seasonally adjusted S&P Global UK PMI came in at 50.6 in January. This was slightly higher than 50.4 in December, but still indicated only a marginal rise in private sector output.
Tim Moore, director of economics at S&P Global Market Intelligence. Said: “January’s data highlighted a tough operating environment for UK service providers as stagflationary conditions appeared to have taken hold at the start of the year. Output levels rose only slightly. While input cost inflation accelerated for the fifth month running to its highest level since April 2024. Firms widely reported a sharp rise in payroll payments and many were also feeling the impact of suppliers delaying upcoming increases in employers’ National Insurance contributions.
A renewed decline in new business volumes added to signs that the UK’s near-term economic outlook remains tilted to the downside. Service providers typically cited risk aversion among customers and subsequent reductions in investment plans. Albeit with resilient spending in areas such as technology services remaining.
“Business activity expectations for the year ahead have fallen in response to weak demand in January, with optimism now at its lowest since December 2022. Respondents pointed to a range of headwinds to growth at home and abroad. Including higher interest rates, geopolitical uncertainty and a post-Budget slide in domestic business confidence.
“The twin risks of shrinking workloads and rising payroll costs meant that many service providers put the brakes on hiring in January. As a result, overall employment numbers across the services economy fell to their sharpest in four years. Job cuts were seen across most sub-sectors, with leisure and hospitality firms reporting a particularly sharp rate of decline.
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