Data released by S&P Global / CIPS showed that the rate of contraction in services activity accelerated in January, but not as much as experts had predicted. At the same time, business expectations for the next 12 months have improved significantly, supported by the weakening of input inflation and more favorable trends in the energy market.
The UK Services PMI fell in January to 48.7 points from 49.9 points in December, reaching its lowest level since January 2021. The index remains below the 50 mark, which indicates a reduction in activity in the sector, for the 4th month in a row. Economists had expected the index to decline to 48.0 points.
Companies reporting a decline in business activity usually referred to a reduction in household income and cautious budget settlement by corporate clients, which was associated with high inflation and growing economic uncertainty. Subdued demand conditions led to new orders falling for the fifth month in a row. Respondents said that increased recession risks and higher borrowing costs were among the main factors holding back new orders. On the contrary, new export sales rose in January, with the growth rate being the highest since July 2022. The higher level of new orders from abroad was mainly due to the growing demand from customers in the US and Asia. The data also signaled an increase in the number of staff in the service sector. However, the pace of job creation was among the lowest in the last two years. As for the inflationary situation, the overall rate of cost inflation has eased in seven of the past eight months and was the lowest since August 2021. Average prices charged by service sector companies increased sharply at the start of 2023 and, in contrast to the trend for input costs, the rate of inflation accelerated slightly since December. As for the prospects, about 48% of respondents predict an increase in business activity in the coming year, and only 12% predict its decline, the net result being the strongest degree of positive sentiment since April 2022.