UK services sector contracts, hitting 14-month low

Business activity across the UK economy has fallen to a 14-month low, with the services sector experiencing its sharpest decline since January 2023. The S&P Global purchasing managers' index (PMI) dropped to an initial estimate of 49.4 in June, falling below the neutral 50 benchmark for the second consecutive month.

The downturn in services was attributed to lower customer confidence, rising costs, and ongoing international trade disruptions, compounded by political turmoil in Westminster. Businesses reported a significant drop in headcounts within the services sector.

Offsetting some of the decline, the manufacturing industry saw its output reach a 21-month high, driven by strategic stockpiling amid ongoing war-related supply worries. Manufacturers also reported moderate growth and a slight increase in job numbers.

Chris Williamson, chief business economist at S&P Global, noted that the fall in private sector activity led to a decline in employment. He highlighted that price pressures remain elevated, with companies pointing to energy shocks and supply chain issues from the Middle East conflict as exacerbating existing cost pressures from government policies.

While price pressures have eased slightly from recent spikes, businesses are still set to feel the impact. Thomas Pugh, chief economist at RSM UK, suggested that the weakening economy could worsen if there is speculation about future fiscal policy. He expressed doubt that growth would significantly improve through the rest of the year.

Pugh reiterated his call for the Bank of England to keep interest rates on hold throughout the year, even with falling energy prices, due to inflation working its way through supply chains. He anticipates rate cuts resuming in 2027.

Shadow Business Secretary Andrew Griffith commented that the weaker confidence was unsurprising given political instability within the Labour Party, adding that the bar for the next Prime Minister and Chancellor had been set low.