Services sector stalls as business confidence and spending take hit

Output from Britain’s vast service industries expanded at the slowest rate in almost a year last month as business confidence and spending was weighed down ahead of the budget.
The S&P Global/Chartered Institute of Procurement and Supply final purchasing managers’ index (PMI) for the £1.7 trillion sector fell from 52.4 to 52.0 in October as businesses waited to learn policy changes from the Labour government.
A reading above 50 still indicates growth but the increase in output was the slowest reported since November 2023.
Respondents to S&P’s survey noted that economic conditions had improved in the UK, helping to lift overall business activity, but some cited “heightened business uncertainty” in advance of the budget as a reason to delay spending decisions. The survey also found that some companies in the sector, which includes industries such as finance, retail, education and health, were finding that geopolitical tensions had discouraged spending.
Confidence declined among consumers and business leaders in advance of chancellor Rachel Reeves’s maiden budget amid uncertainty about tax rises. The government indicated that it would need to increase taxes to address a “black hole” in the nation’s finances, prompting the GfK consumer confidence index to fall from minus 13 in August to minus 20 in September, with the Institute of Directors’ economic confidence index registering a decline from minus 12 in August to minus 38 in September.
In last week’s budget Reeves announced that employers’ national insurance contributions would be increased to raise about £25 billion. The move is forecast to put pressure on wage increases, and the Institute for Fiscal Studies has said that the increase will be most significant at large companies hiring people on lower salaries.
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Tim Moore, economics director at S&P Global Market Intelligence, said: “October data signalled another slowdown in output growth across the service sector as heightened business uncertainty and concerns about the general UK economic outlook had an adverse impact on demand conditions.
“The wait for clarity on government policy ahead of the autumn budget was widely reported to have weighed on business confidence and spending. Broader geopolitical concerns and forthcoming US elections also added to a sense of wait-and-see on business investment decisions in October. At the same time, cost of living pressures remained a constraint on household spending.”
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said the slowdown would give the Bank of England’s monetary policy committee “further confidence to cut bank rate this week and signal further gradual cuts in 2025”.
He added: “The PMI has been beset by budgetary uncertainty this month, rather than material weakening in economic conditions. Forward-looking parts of the survey still suggest growth will rebound later in the year, and the chancellor’s expansionary budget should also boost GDP.
“Firms were optimistic about their sales pipelines and broader market conditions but felt that political uncertainty had dampened confidence in October. On the prices front, input price inflation eased in October but output price rises gained pace slightly.”
Matt Swannell, chief economic adviser to the EY Item Club, said that the latest data was not “a major cause for concern”. He added: “The data can be quite volatile, while the survey’s compilers reported that uncertainty in the lead-up to the budget was delaying spending decisions.
“The survey reported that stronger wage pressures pushed up input cost inflation, and businesses reflected this in higher output prices. But in both cases, the increases were coming after multi-year lows in September.”