Key facts
- UK services sector PMI dropped to 48.8 in June, indicating contraction.
- This marks the fastest rate of decline in three-and-a-half years.
- Key factors cited include cost pressures, weak demand, and geopolitical uncertainty.
- Job losses in the sector increased at the sharpest rate since February.
- Business optimism saw a marginal improvement but remains subdued.
The UK's services sector contracted for the first time in three-and-a-half years in June, with the Purchasing Managers' Index (PMI) falling to 48.8 from 49.3 in May. This decline, remaining below the neutral 50.0 mark, was attributed by businesses to significant cost pressures, weak consumer demand, and uncertainties stemming from the Middle East conflict.
Service sector firms highlighted "fragile investment sentiment" and "elevated risk aversion" as consumers faced squeezed budgets. While the FIFA World Cup provided a boost to hospitality demand, some consumer-facing businesses were impacted by a late-June heatwave. Average prices increased sharply, though at the slowest pace since February, as intense competition and subdued demand limited the ability of firms to pass on higher costs.
The pace of job losses across the sector also accelerated, falling at the sharpest rate since February. Business optimism saw a marginal improvement compared to May, supported by hopes of a durable US-Iran ceasefire agreement and positivity towards business development plans. However, many firms expressed concerns about the broader UK economic outlook.
Political uncertainty looms as Andy Burnham is set to become Prime Minister. One of his initial challenges will be securing £4.7 billion to fund the outgoing Prime Minister Sir Keir Starmer's defense investment plan. Burnham has committed to not raising income tax, VAT, or national insurance, and has ruled out "crude cuts to benefits," raising questions about funding sources for his commitments.
Economists anticipate limited growth for the remainder of the year. Despite the likelihood of a smooth leadership transition, speculation about the future direction of fiscal policy is expected to persist. Burnham has indicated a potential prioritization of increasing business rates on warehouses to fund tax cuts for high street businesses.