UK Service Sector Shrinks For First Time Since Early 2021

(RTTNews) - The UK service sector shrank in October for the first time since early 2021, as heightened political and economic uncertainty weighed on investment decisions and sentiment, final data from S&P Global showed on Thursday.

The Chartered Institute of Procurement & Supply services Purchasing Managers' Index posted 48.8 in October, down from 50.0 in September. This was the lowest score since January 2021 but above the flash reading of 47.5.

The decline in service sector output was linked to cautious spending patterns among businesses and consumers. Respondents noted that political uncertainty since the mini-Budget had adversely impacted business investment and encouraged a wait-and-see approach to new project.

New business dropped for the second straight month and was the fastest fall since early 2021. Rising inflation and higher borrowing costs squeezed client budgets and weighed on discretionary spending. New work from abroad also fell for the second month running.

Employment remained a relatively bright spot in October as staffing levels were increased for the 20th consecutive month. The rate of job creation was the slowest since March 2021.

The survey showed that escalating energy bills and strong wage pressures led to another rapid increase in business expenses. Although overall input price inflation eased for the fifth month running, it remained high.

Output charge inflation was the weakest since January, but still exceptionally strong in comparison to historic trends.

Optimism regarding the outlook for service sector activity in the year ahead deteriorated sharply since September, with the respective index slumping to its lowest since April 2020.

"The sector had already been teetering on the edge of the abyss in September but it was uncertainty around the strength of the UK economy that pushed it into contraction," John Glen, chief economist at Chartered Institute of Procurement and Supply, said.

The overall private sector output shrank for the third month in a row. The composite output index dropped to 48.2 in October from 49.1 in September. The flash reading was 47.2. Manufacturing production fell at a much faster pace than service sector activity.