Cautious consumers send chill through UK services economy

Consumers are rolling back spending at pubs, bars and restaurants in response to rampant inflation whacking their budgets, reveals a closely watched survey published today.

New business growth in Britain’s services industry, its economic engine, slowed to its worst level in 16 months in June, according to S&P Global’s purchasing managers’ index (PMI).

The cool down was attributed to “higher inflation and worries about the economic outlook le[ading] to hesitancy in relation to new orders,” S&P Global said.

Despite stalling new business expansion, the services industry continues to hold up well amid the headwinds hitting the UK economy, primarily driven by strong demand for staycation holidays.

The final PMI for June edged higher to 54.3, up from 53.4 in May, slightly above the City’s expectations.

However, weakening new business activity suggests the services industry may struggle to keep its head above the 50 point threshold that separates growth and contraction in the coming months.

Inflation has surged to a 40-year high of 9.1 per cent, but is forecast by the Bank of England to top 11 per cent in October when the energy regulator lifts the cap on bills again, meaning the screw on household finances will keep on tightening during this year.

Tim Moore, economics director at S&P Global, said: “Service providers are casting a nervous eye over their sales momentum and forward bookings, which led to a slump in business activity expectations to their lowest since May 2020.”

Concerns about the weakening trading environment, “recession risks, worries about persistently high inflation and the impact of rising interest rates on demand” pushed business confidence to its lowest level since May 2020, S&P Global said.

Services business hiked prices at the second quickest pace on record to shield margins from swelling transport and worker costs, providing more evidence that inflation shows little sign of abating.