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UK service sector still in downturn as recession looms

Services sector: Visitors admire St. Paul's Cathedral from the Tate Modern gallery in London
The services sector index came in at 48.8 last month, matching October’s reading which was the lowest level since January, and signalled a second consecutive monthly fall. Photo: Alessia Pierdomenico/Reuters

The UK service sector continued to shrink last month with the fastest fall in new business volumes since January 2021.

According to the latest survey of purchasing managers, activity fell again in November as levels of incoming new work declined. This was thanks to ongoing economic uncertainty and cost of living challenges weighing on discretionary spending.

The S&P Global and CIPS index came in at 48.8 last month, matching October’s reading which was the lowest level since January, and signalled a second consecutive monthly fall.

Although it was in line with expectations, any figure below 50 indicates a contraction, hinting at a growing recession risk for the UK.

The reading came in unchanged from October. Chart: S&P Global, CIPS
The reading came in unchanged from October. Chart: S&P Global, CIPS

UK firms once again linked the decline to a reduction in new sales volumes, amid reports of ongoing caution amongst businesses and belt-tightening amongst households, S&P Global said.

Overall, sales were down for a third month in a row, and to the sharpest degree since January 2021's lockdown-induced reduction.

Budgets were reported to be under pressure from both domestic and foreign clients. New export business was also down for the third successive survey period, although only marginally, as a weak pound helped support trade with the US.

Businesses did manage to continue hiring additional staff, the survey found, as they sought to address skills shortages at their units. But there were some reports of hiring freezes and the non-replacement of leavers as firms grew concerned over costs and operating margins.

Confidence in the outlook remained historically subdued, despite improving noticeably since October.

Read more: UK in recession until end of 2023, CBI warns

Meanwhile, expenses rose again at an extremely elevated rate over the period, with inflation picking up since October's 13-month low.

Efforts to retain and meet the pay demands of staff were reported to have led to higher wages and salaries being paid. Utility bills, food prices and fuel costs also remained key drivers of inflation.

Average output prices rose as a result, marking a twenty-third successive month in which prices charged have increased. However, mounting competitive pressures and the weaker demand environment meant that overall output price inflation dropped to its lowest level for 10 months.

Looking towards the future, confidence in the outlook improved somewhat since October as the political turmoil caused by Kwasi Kwarteng’s mini-budget somewhat dissipated.

“A change of government and its new economic policies may have helped arrested some of the financial market volatility after September’s ‘mini-budget’ but the economic picture remains stubbornly unchanged,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

Read more: Cost of living: Minimum wage rates leave under 21s out of pocket by £2.5bn

“The overall rate of economic contraction has held steady compared to October, indicative of GDP falling at a quarterly rate of 0.4%. As such, this is the toughest spell the UK economy has faced since the global financial crisis excluding only the height of the pandemic.”

Joshua Raymond, director of online investment platform XTB.com said: “Perhaps the most troubling part of the data is the fact that new business volumes declined by their fast pace in almost two years.

“That's a red flag as a forward looking indicator and raises the likelihood that the contraction in UK economic activity is deepening. We saw investors sell out of the GBP in various positions this morning, with the pound falling between 0.1% and 0.3% against most major currencies such as the euro."

Watch: What is a recession and how do we spot one?