The UK's services sector has suffered its biggest contraction in nearly three-and-a-half years, according to the latest Purchasing Managers' Index (PMI) figures. Despite some consumer-facing businesses benefiting from the FIFA World Cup, the overall sector struggled with rising costs, weak demand and geopolitical tensions.
The S&P Global PMI, a key indicator of economic health, dropped to 48.8 in June, down from 49.3 in May. A reading below 50 signifies contraction, highlighting a challenging period for service providers nationwide. Tim Moore, economics director at S&P Global Market Intelligence, cited "strong cost pressures, lacklustre demand and business uncertainties stemming from the Middle East conflict" as primary challenges faced by firms in June. These factors contributed to "fragile investment sentiment" and "elevated risk aversion" amidst ongoing pressure on consumer budgets.
While the World Cup provided a temporary boost for some hospitality businesses, other consumer-facing companies were impacted by a late-June heatwave, which reduced footfall. Average prices charged by service providers rose sharply in June, with the rate of increase being the least pronounced since February. Firms indicated that intense competition and subdued demand limited their ability to fully pass on these higher costs to customers.
The employment picture within the services sector also deteriorated, with job losses accelerating at their sharpest rate since February. Although business optimism improved marginally from May, supported by hopes for a US-Iran ceasefire and positive business development plans, it remained considerably softer than at the start of the year. Many firms expressed ongoing concerns about the broader economic outlook for the UK.
The impending change in leadership, with Andy Burnham set to take office as Prime Minister, is adding another layer of uncertainty for businesses. One immediate challenge for the new Prime Minister will be securing the £4.7 billion needed to fund Sir Keir Starmer's defence investment plan, a commitment made by the outgoing government. While Mr Burnham has reaffirmed Labour's manifesto pledges against increasing income tax, VAT or national insurance, and stated he would avoid "crude cuts to benefits," questions remain regarding the funding of defence and other policy priorities.
Analysts, such as Thomas Pugh, chief economist at RSM UK, anticipate that growth will remain subdued for the remainder of the year. Mr Burnham has indicated a preference for increasing business rates on warehouses to fund tax cuts for high street businesses, including bars, restaurants, coffee shops and hairdressers. He has also stated he is deliberately delaying the announcement of his Chancellor pick to allow time to "set out a new direction for the country."