The UK services sector shrank in October for the first time since February 2021 as the mini-budget took its toll, according to a survey released on Thursday.
The S&P Global/CIPS services purchasing managers’ index declined to 48.8 from 50.0 in September, marking the worst reading since January last year. A level below 50.0 signals contraction, while a reading above indicates expansion.
The survey found that political uncertainty and rising borrowing costs since the mini-budget had dented business investment and encouraged a wait-and-see approach to new projects.
Tim Moore, Economics Director at S&P Global Market Intelligence, said: “There were also many reports that higher energy bills had led to reduced spending on non-essential services.
“Overall input price inflation slowed for the fifth month running during October, which signalled a gradual easing of cost pressures from the record highs seen this spring. However, the latest rise in business expenses was still faster than at any time in the survey history prior to the pandemic, driven by further steep increases in energy costs and staff wages.
“Stubbornly high inflation, increased borrowing costs and worries about the UK economic outlook all contributed to weaker business optimism in October. Aside from the slump at the start of the pandemic, the degree of confidence across the service economy is now the lowest since December 2008.”
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said the survey continues to suggest that the economy is entering a recession, with the PMI consistent with GDP falling by 0.2% on a three-month-on-three-month basis in October.
“The forward-looking sub-components, meanwhile, suggest the downturn will accelerate. The new orders balance dropped to 46.8 – its lowest level since January 2021, when the UK economy still was in full lockdown – from 48.6, on the back of both weaker domestic and external demand. Note that the new export orders balance fell to 43.8, from 45.6 in October.
“Businesses also were the least upbeat about the 12-month outlook since April 2020, suggesting they likely will hold off investment projects and will begin to let staff go.”
Dickens said she continues to expect GDP to contract by 0.5% quarter-on-quarter in Q4, building on a likely 0.5% drop in Q3, and for it to fall by a further 1.2% over the course of 2023.
