The services sector contracts for the first time since confinement

Activity in Britain’s dominant services sector contracted last month for the first time since the start of the third COVID-19 lockdown in January last year, according to a closely watched survey.

The sector, which represents 80 percent of the economy from banks to retailers, tourism, hairdressers, restaurants and real estate agencies, warned of contracting demand and greater risk aversion among customers due to the greatest political and economic uncertainty. Companies also faced higher costs as a result of rising energy bills and salary pressures as they struggled to fill vacancies and retain staff.

The S&P Global UK Services Purchasing Managers’ Index (PMI) fell to 48.8 in October, below the growth threshold of 50 where the index was in September. The reading was better than an initial “flash” reading of 47.5, but remains the largest contraction in trading activity since January 2021.

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The survey follows this week’s PMI figures which show a further contraction in UK manufacturing activity to a 29-month low of 46.2 from 48.4 in September as manufacturers cut jobs by for the first time in almost two years and new orders fell at the fastest pace since the first lockdown in 2020.

The composite PMI, which combines the services and manufacturing survey, fell to 48.2 in October from 49.1, the lowest reading since January 2021.

Overall, polls point to the economy heading into recession. The economy’s growth has slowed as the Bank of England has raised interest rates to bring double-digit inflation to its 2 percent target. This has left households facing the biggest drop in income since the 1950s.

Tim Moore, chief economics officer at survey compiler S&P Global, said: “Several companies noted that political uncertainty and rising borrowing costs since the mini-budget had led to greater risk aversion among clients and a focus on to wait and see the new projects.”

Former Prime Minister Liz Truss’s unfunded growth plans on September 23 sparked a sell-off in the UK bond market as investors lost confidence in the government. The turmoil has eased following a U-turn in those plans and the appointment of Rishi Sunak as Prime Minister.

Moore said cuts in household spending and reduced business investment had combined to dent new order volumes and confidence. He added that although commodity costs fell for the fifth month in a row, the rise in business spending was “faster than at any time in the survey’s history before the pandemic.”

Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics, said: “Companies may also be more hesitant than usual to lay off staff, given their recent hiring difficulties, but preserving profits will require job cuts next year.”

She expects the economy to contract 0.5 percent quarter over quarter in the last three months of the year.

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