Services sector shrinks for first time since lockdown

Activity in Britain’s dominant services sector contracted last month for the first time since the start of the third Covid-19 lockdown in January last year, according to a closely watched survey.

The sector, which accounts for 80 per cent of the economy from banks to retailers, tourism, hairdressers, restaurants and estate agents, warned of shrinking demand and greater risk aversion among customers because of heightened political and economic uncertainty. Companies also faced higher costs as a result of rising energy bills and wage pressures as they struggled to fill vacancies and retain staff.

The S&P Global UK services purchasing managers’ index (PMI) fell to 48.8 in October, below the 50 threshold for growth, where the index was in September. The reading was better than an initial “flash” reading of 47.5 but it is still the biggest contraction in business activity since January 2021.

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The survey follows PMI figures this week showing a further contraction in activity at UK manufacturers to a 29-month low of 46.2 from 48.4 in September as manufacturers cut jobs for the first time in almost two years and new orders shrank at the fastest pace since the first lockdown in 2020.

The composite PMI, which combines the services and manufacturing survey, fell to 48.2 in October from 49.1, the lowest reading since January 2021.

Overall the surveys point to the economy heading for recession. Growth in the economy has been slowing as the Bank of England has raised interest rates to bring double-digit inflation back to its 2 per cent target. This has left households facing the biggest squeeze on income since the 1950s.

Tim Moore, economics director at the survey compiler S&P Global, said: “A number of firms noted that political uncertainty and rising borrowing costs since the mini-budget had led to greater risk aversion among clients and a wait-and-see approach to new projects.”

The unfunded growth plans of the former prime minister Liz Truss on September 23 resulted in a sell-off in the UK bond market as investors lost confidence in the government. The turmoil has eased following a U-turn on those plans and the appointment of Rishi Sunak as prime minister.

Moore said that household spending cutbacks and shrinking business investment had combined to dent new order volumes and confidence. He added that, although raw material costs had fallen for the fifth month in a row, the rise in business expenses was “faster than at any time in the survey history prior to the pandemic”.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said: “Firms might also hesitate more than usual to fire staff, given their recent recruitment difficulties, but profit preservation will necessitate job cuts next year.”

She expects the economy to contract by 0.5 per cent quarter-on-quarter in the final three months of year.

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Services sector shrinks for first time since lockdown