UK services sent into decline amid ‘market turbulence’
UK output was sent into decline by “market turbulence” in April for the first time in one and a half years, prompting fears that Chancellor Reeves’ £40bn tax raid last autumn was damaging the country’s services economy.
The services sector, which is seen as the engine behind UK growth, had been on a 17-month winning streak, according to S&P Global’s latest purchasing managers’ index (PMI).
But fresh data has suggested that its downturn in April has pushed overall output over into the red, flattening Reeves’ hopes of delivering “faster” growth.
Researchers at S&P Global said that business activity in the sector contracted due to the “impact of global financial market turbulence” and a further acceleration in job cuts.
Higher employers’ national insurance contributions and a hike to the national living wage also kicked in last month, racking up costs for firms.
The horizon ahead looks even stormier as confidence fell to its lowest level in two and a half years.
The reading for S&P Global’s composite output dropped to 48.5 last month, below the neutral 50-figure benchmark.
Export sales also saw its fastest decline in more than four years, reflecting the “impact of global financial market turbulence in the wake of US tariff announcements,” according to S&P Global’s economics director Tim Moore.
“Businesses in the technology and financial service sectors noted rising risk aversion and
delayed spending decisions among clients, especially in relation to major investment plans,” Moore said.
“Consumer service providers meanwhile cited subdued domestic economic conditions and challenges with passing on rising payroll costs, especially those in the hospitality and leisure sectors.”
The survey of around 650 companies also highlighted some of the tensions key UK industries face in relation to higher costs.
More than two in five companies said their costs had increased, pointing to the highest rate of inflation since mid-July.
Services firms are also raising prices at their highest level for nearly two years as employment costs rack up.
S&P Global also said that spending decisions were also delayed while more redundancies were reported.
Stagflation concerns grow
High inflation and a contraction in output are likely to drive concerns about ‘stagflation’, raising the stakes of the Bank of England’s next interest rate decision on Thursday.
The Bank’s policymakers are expected to agree on a 25 basis point cut but questions remain over whether the Monetary Policy Committee (MPC) drops its “gradual and careful” approach to rate-cutting.
Investors have nudged the Bank to commit to faster interest rate cuts and allow the economy to bounce back into action.